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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 0-20096
GLIATECH INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1587242
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
23420 Commerce Park Road, Cleveland, Ohio 44122
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 831-3200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.01 Par Value Per Share
Indicate by checkmark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirement for the past 90 days. Yes X No
--- ---
Indicate by checkmark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
Annual Report or any amendment to this Form 10-K. [X]
Aggregate market value of Common Stock held by non-affiliates
as of March 20, 1997 at a closing price of $10.00 per share as reported by the
Nasdaq National Market was approximately $51,185,410. Shares of Common Stock
held by each officer and director, their respective spouses, and by each person
who owns or may be deemed to own 10% or more of the outstanding Common Stock
have been excluded since such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Number of shares of Common Stock outstanding as of March 20, 1997 was 7,346,272.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference
to Parts II, III and IV of this Annual Report on Form 10-K: (i) the Proxy
Statement for the Registrant's 1997 Annual Meeting of Stockholders (the "Proxy
Statement") and (ii) the Registrant's 1996 Annual Report for the fiscal year
ended December 31, 1996 (the "Annual Report").
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GLIATECH INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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PAGE
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PART I
ITEM 1. Business...........................................................................-1-
Item 2. Properties........................................................................-11-
Item 3. Legal Proceedings.................................................................-11-
Item 4. Submission of Matters to a Vote of Securityholders................................-11-
Item 4A. Executive Officers of the Company.................................................-11-
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters................-12-
Item 6. Selected Financial Data...........................................................-12-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.....................................................................-12-
Item 8. Financial Statements and Supplementary Data.......................................-12-
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................................-12-
PART III
Item 10. Directors and Executive Officers of the Company..................................-12-
Item 11. Executive Compensation...........................................................-13-
Item 12. Security Ownership of Certain Beneficial Owners and Management...................-13-
Item 13. Certain Relationships and Related Transactions...................................-13-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................-13-
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PART I
ITEM 1. BUSINESS.
GENERAL
The Company is engaged in the development and commercialization of
medical devices designed to inhibit excessive surgical scarring and adhesion
formation following surgery. Postoperative scarring and adhesion formation can
become excessive, binding together tissues and organs causing pain, obstruction
and impairment of function. Further, excessive scarring can obstruct access to
the surgical site, making additional surgery difficult. The Company is engaged
in the development and commercialization of the ADCON family of medical devices
to address such postoperative complications. In addition, the Company is
pursuing the development of drug candidates for the treatment of certain nervous
system disorders, including Alzheimer's Disease, through its strategic alliance
with Janssen Pharmaceutica, N.V. of Belgium ("Janssen"), a wholly-owned
subsidiary of Johnson & Johnson, and cognitive disorders.
The ADCON family of medical devices are being developed by the Company
to inhibit excess scarring and adhesion formation at the surgical site. The
initial ADCON products are formulated as proprietary resorbable gels for direct
application by surgeons to organs and tissues during surgery to inhibit surgical
scarring and adhesions. ADCON-L is designed to inhibit scarring and adhesion
formation following lumbar disc surgery. ADCON-T/N is designed for use in tendon
and peripheral nerve repair surgeries such as carpal tunnel syndrome and
tenolysis. In addition to ADCON-L and ADCON-T/N, the Company is in earlier
stages of development of several additional ADCON products for use in
pelvic/gynecological, abdominal, cardiac and implant/prosthetic surgeries.
Because of the differences in the body environments in which each of these
product candidates would be used, a number of different formulations may be
required.
Based on European pivotal clinical studies and other compliance efforts
and the submission of other data, the Company obtained regulatory clearances to
affix CE Marking on ADCON-L and ADCON-T/N thereby allowing ADCON-L and ADCON-T/N
to be marketed in the 15 European Union countries for lumbar disc surgery and
tendon and peripheral nerve repair surgery, respectively. The Company has
entered into distribution agreements and is currently selling both ADCON-L and
ADCON-T/N with independent distributors in Australia, Austria, Belgium, Germany,
Italy, The Netherlands, New Zealand, Scandinavia, Spain, Switzerland and the
United Kingdom. Additionally, in the United States, in February 1997, the
Company received notification that its Premarket Approval Application ("PMA")
for ADCON-L had been accepted for filing by the U.S. Food and Drug
Administration ("FDA"). Pivotal clinical trials are currently being conducted
for both ADCON-L and ADCON-T/N. The Company intends to submit a PMA to the FDA
for ADCON-T/N upon successful completion of the trial.
The Company is also engaged in the research and development of
therapeutic products for the treatment of certain nervous system disorders,
including Alzheimer's Disease and cognitive disorders. Studies have shown that
certain glial cells and glial-derived factors are consistently associated with
senile neuritic plaques, which are thought to be a key contributor to
Alzheimer's Disease pathology. In October 1994, the Company entered into an
agreement with Janssen to collaborate on the research and development of
therapeutic products to treat Alzheimer's Disease (the "Janssen Agreement"). In
addition, in September 1995, the Company entered into an addendum to the Janssen
Agreement in order to expand the scope of the collaboration. As a result of
screening compounds from Janssen's pharmaceutical library, several potential
lead compounds have been identified.
The Company's Cognition Modulation program is focused on a class of
compounds designed to act on the histamine H3 receptor in the brain which
regulates sleep/wakeful states and modulates the level of arousal and alertness.
An antagonist to this receptor could lead to enhanced states of alertness for
treating attention deficit hyperactive disorder (ADHD), sleep disorders,
obesity, anxiety and the cognitive deficit in Alzheimer's Disease patients.
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ADCON SURGICAL ADHESIONS PRODUCTS
During the normal healing process following surgery a matrix of scar
tissue forms at the surgical site. In many cases, scar formation results in
surgical adhesions that can become excessive, binding together tissues and/or
organs, causing pain, obstruction and impairment of function. Further, excessive
scarring can obstruct access to the surgical site, making additional surgery
difficult.
The Company is developing and commercializing the ADCON family of
medical devices to act as a barrier to surgical adhesions at the surgical site.
The initial ADCON products are formulated as proprietary resorbable gels to
inhibit surgical scarring and adhesions for direct application by surgeons to
organs and tissues during surgery.
ADCON-L
ADCON-L is formulated as a proprietary resorbable gel which is applied
directly by surgeons to the surgical site following lumbar disc surgery. ADCON-L
provides a physical barrier between the membrane covering the spinal cord and
the back muscles and between the spinal nerve roots and the inner surface of the
vertebral body. This barrier is designed to inhibit excess scarring and
resultant adhesion formation at the surgical site.
Development and Regulatory Status. Based on the results of a pivotal
clinical trial of ADCON-L in Europe, among other factors, the Company obtained
regulatory clearances to affix CE Marking for ADCON-L in the European Union
countries. The CE Marking for ADCON-L allows the Company to market ADCON-L in
the 15 European Union countries (Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain,
Sweden and the United Kingdom) for lumbar disc surgery patients. Based on the
results of a multicenter pivotal trial in European medical facilities, ADCON-L
received European Union ("EU") regulatory approval for sale of such product
throughout the EU and Australia and New Zealand. In February 1997, the Company
received notification that its PMA for ADCON-L had been accepted for filing by
the FDA. The Company is currently conducting pivotal U.S. clinical trials for
ADCON-L.
ADCON-T/N
ADCON-T/N is a proprietary resorbable gel which is applied directly by
surgeons to the surgical site following tendon and peripheral nerve surgeries
such as carpal tunnel syndrome and tenolysis. The formation of adhesions which
bind the tendon to surrounding tissues results in a reduction of the tendon's
ability to glide, thus limiting the range of motion. In the peripheral nervous
system, postsurgical scar formation can lead to scarring and compression of
nerves. The combination of scarring and nerve adhesions can result in loss of
nerve function and pain.
Development and Regulatory Status. The Company obtained regulatory
clearances to affix CE Marking for ADCON-T/N in the EU based on the results of
European clinical studies submitted to a European designated agency. ADCON-T/N
is now being sold in all major countries in the EU, as well as Australia and New
Zealand for use in tendon and peripheral nerve surgeries. The Company is
currently conducting pivotal U.S. clinical trials for ADCON-T/N. The Company
intends to submit a PMA for ADCON-T/N to the FDA upon the successful completion
of these studies.
OTHER ADCON PRODUCTS
The Company is also conducting preclinical studies relating to
applications of its ADCON technology in preventing surgical adhesions in a
variety of other surgical procedures. Potential product candidates are being
developed for use in surgeries where adhesions are common and are known to
create troublesome complications including: (i) pelvic/gynecological surgery,
where adhesions may occlude or otherwise impair the normal function of the
ureters, bladder, uterus or fallopian tubes; (ii) abdominal surgery, where
peritoneal adhesions between organs and/or the abdominal wall may seriously
impair gastrointestinal function; (iii) cardiac surgery, where adhesions may
significantly increase the risk of injury during re-operation; and (iv)
implant/prosthetic surgery,
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where adhesions may compromise the effective performance of a medical device.
Because of the differences in the body environments in which each of these
product candidates would be used, a number of different formulations may be
required.
MARKETING AND SALES
Currently, the Company is marketing its ADCON products through
independent medical device distributors. As of December 31, 1996, the Company
has entered into agreements with independent distributors regarding
country-specific sales and distribution rights to ADCON-L and ADCON-T/N in
Australia, Austria, Belgium, Germany, Italy, The Netherlands, New Zealand,
Scandinavia, Spain, Switzerland and the United Kingdom. Discussions with respect
to distributor arrangements in other major countries are ongoing. In December
1996, the Company also signed a development and license agreement with Chugai
Pharmaceutical Co., Ltd. for the exclusive development and sale, after obtaining
necessary governmental approvals, of ADCON-L and ADCON-T/N products in Japan.
These distribution agreements generally provide the distributors with
exclusive distribution rights in their assigned territory. The agreements
require the distributors to meet specified minimum annual sales targets. In
certain of the distribution agreements, the Company may, upon the expiration of
applicable notice periods, terminate the exclusivity of such arrangement or
terminate the arrangement, as the case may be, in the event such sales goals are
not achieved. The Company provides marketing and advertising support to its
distributors and conducts training seminars for distributor personnel. These
distributors are independent third parties, are not employees of the Company and
are not directly under the control or supervision of the Company, except that
they are subject to the terms and conditions of their respective distribution
agreements. There can be no assurance that the current relationships with
distributors will be successful or that the Company will be able to enter into
similar distribution arrangements in other markets, or that such arrangements
will be available on acceptable terms and conditions to the Company. Furthermore
there can be no assurance that the ADCON products will be successfully marketed
since the Company does not control the distribution of its products and relies
exclusively on third parties for its distribution of products.
MANUFACTURING AND SUPPLIERS
The Company does not have any manufacturing facilities and presently
utilizes a sole foreign contractor, European Medical Contract Manufacturing,
located in Nijmegen, The Netherlands, for the manufacture of its commercial and
clinical requirements of ADCON-L and ADCON-T/N. The Company currently purchases
the key components for ADCON-L and ADCON-T/N from suppliers and provides such
components to the contract manufacturer who formulates these components into the
gel for the ADCON-L and ADCON-T/N products. The contract manufacturer is
registered as a subcontractor for the manufacture of pharmaceutical products by
The Netherlands designated agency and is certified to ISO requirements for
manufacture of such products. ISO Certification is an internationally recognized
standard of quality manufacturing. It is, however, the Company's intention to
identify additional manufacturers in the future, including a U.S. based contract
manufacturer. The manufacture of the Company's products is subject to Good
Manufacturing Practices regulations ("GMP") or other requirements prescribed by
the appropriate regulatory agency in the country of use. There can be no
assurance that the Company's current manufacturer will continue to comply with
all applicable regulatory requirements or that such manufacturer will be able to
supply the Company with such products or that the Company will be able to
identify additional manufacturers of its products on terms acceptable to the
Company.
The Company currently obtains one of the key components for its ADCON
products from a single supplier. The Company also has developed its own
proprietary process to manufacture this key component and is currently
manufacturing it on a pilot basis through a contract manufacturer according to
GMP standards. In addition, the Company is pursuing qualification of additional
suppliers. There can be no assurance that additional suppliers will be
identified or that the key components will be available on terms acceptable to
the Company.
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ADCON RESEARCH AND LICENSE AGREEMENTS
The Company is a party to a license agreement and a related sponsored
research agreement with a university that provides for a royalty of up to 5% of
revenues from products covered by these agreements. In 1995, a dispute regarding
inventorship of the ADCON products and the rights of the university to receive
royalties from sales of ADCON products arose between Gliatech and the
university. The university has threatened litigation regarding this matter.
Gliatech and the university have had, and are continuing to have, discussions
regarding this dispute. There has been no resolution of this matter. The Company
is not able to make any estimate of costs that may arise as a result of any
outcomes from this dispute and there can be no assurance that the Company will
not be required to pay any costs or royalties or that any costs to the Company,
or royalties that may result, from this dispute will not have an adverse effect
on the Company.
NERVOUS SYSTEM DISORDERS
The Company's longer-term research is focused on the development of
therapeutic products for the treatment of nervous system disorders for which the
Company believes existing therapies are inadequate. The Company is presently
pursuing the development of small molecular weight compounds for the treatment
of Alzheimer's Disease and cognitive disorders.
The Company's strategy is to pursue its nervous system disorder
programs through collaboration with third parties. The Company has entered into
a strategic alliance with Janssen to collaborate on the research, development
and commercialization of certain treatments for Alzheimer's Disease. To date,
the Company has pursued the development of its Cognition Modulation technology
independently. The Company, however, does not anticipate funding clinical trials
relating to this program in the absence of a strategic partner. No assurances
can be given that the Company will be able to identify a strategic partner, or
that in the event the Company identifies a strategic partner, that such
strategic partner will enter into an alliance with the Company or that the
operation of any such alliance will be successful.
ALZHEIMER'S DISEASE
Role of Glial Cells in Alzheimer's Disease. The cause of Alzheimer's
Disease is unknown, and there are no proven means of prevention or cure. The
Company believes that research in Alzheimer's Disease has been directed
primarily at providing replacement therapy for neurotransmitter deficiencies,
such as in the cholinergic system, in order to alleviate the symptoms. Attempts
to stop the progression of the disease have centered on identifying a
neurotrophic factor, or combination of factors, which may slow neural
degeneration. The Company believes that glial cells have received inadequate
attention in the study of Alzheimer's Disease. Glial cells are one of the two
interrelated networks of cells in the nervous system. The interrelated networks
of cells consists of neurons, which transfer and process information from around
the body, and glial cells, which monitor and regulate the neuronal system and
play an active role in maintaining normal brain function. Recent research into
Alzheimer's Disease has focused on the role of beta-amyloid in the formation of
senile neuritic plaques.
The Company's Alzheimer's Disease Program
Utilizing its strengths in glial cell technology, the Company is
conducting research to develop therapeutic products to slow the progression of
Alzheimer's Disease. In October 1994, the Company and Janssen entered into the
Janssen Agreement to collaborate on the discovery and development of compounds
suitable for the treatment of Alzheimer's Disease and other neurodegenerative
diseases. The Company is primarily pursuing two specific mechanisms by which
glial cells seem to play a role in the amyloid-associated neurotoxicity of
Alzheimer's Disease.
Beta-Amyloid Induced Inflammation. The Company has discovered that
beta-amyloid peptide, the major component of senile plaques, causes significant
changes in glial cell metabolism. The action of beta-amyloid on microglia leads
to the release of inflammatory cytokines such as interleukins and tumor necrosis
factor. A similar release of cytokines has been reported to occur in the brain
of Alzheimer's patients. The Company is working with Janssen on the development
of small molecular weight compounds that reduce the effects of beta-amyloid
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on glial cells and thus block or reduce the release of inflammatory agents. A
number of high capacity assay systems have been developed by the Company which
are being used to analyze Janssen's pharmaceutical library for molecules which
inhibit these beta-amyloid-induced actions. As a result of this analysis,
several potential lead compounds have been identified.
Inhibitors of Complement Activation. The Company is also pursuing
research relating to activated proteins from the classical complement cascade
that are associated with beta-amyloid in Alzheimer's Disease senile plaques. The
complement cascade is part of the immune response typically invoked in response
to systemic infections, resulting in the death of pathogenic cells, but is not
usually found in the brain. The Company has discovered that beta-amyloid can
bind one of these factors and activate the complement cascade, providing an
explanation for the presence of activated complement in patients with
Alzheimer's Disease. The Company is working with Janssen on the development of
small molecular weight compounds that would block this complement activation.
The Company has developed proprietary screens and has used these to identify
several potential lead compounds that block beta-amyloid induced activation of
the complement cascade.
Alzheimer's Disease Models. The Company has also developed secondary
screens with which to further characterize compounds identified in the
high-throughput screens. In addition, Janssen is funding the development of an
animal model of Alzheimer's Disease. To date, Company scientists have
demonstrated that the deposition of fibrillar beta-amyloid results in activation
of neuroglia in this model. Moreover, certain aspects of the inflammatory
response seen in Alzheimer's Disease seem to occur in this model. If the
appropriate aspects of Alzheimer's Disease pathology are replicated in this
model, it will be used to test the in vivo efficacy of selected compounds.
The Janssen Agreement
Under the terms of the Janssen Agreement, Johnson & Johnson Development
Corporation, a subsidiary of Johnson & Johnson, made an equity investment in the
Company. Janssen, a wholly owned subsidiary of Johnson & Johnson, paid the
Company an initial licensing fee. The Janssen Agreement provides funding by
Janssen to the Company for Alzheimer's Disease research through October 1997.
The Janssen Agreement is renewable, at Janssen's options, for one or two years
thereafter. In addition, in September 1995, the Company entered into an addendum
to the Janssen Agreement in order to expand the scope of the collaboration on
Alzheimer's Disease to include research relating to inhibitors of complement
activation. Janssen is required to make additional payments to the Company upon
the attainment of certain clinical and developmental milestones. Janssen is also
responsible for all development costs, including the cost associated with
clinical trials and obtaining regulatory approval. Janssen's parent, Johnson &
Johnson, has worldwide distribution rights for any products developed as a
result of this collaboration. The Company will receive a royalty from Janssen on
any sales of such products.
COGNITION MODULATION
The Company is developing a class of small molecular weight compounds
designed to act on the histamine H3 receptor in the brain. Histamine is a
chemical messenger, released from certain neurons in the brain, which regulates
sleep/wake states and modulates levels of arousal and alertness in the conscious
state. The histamine H3 receptor is predominately found in the brain and
regulates the synthesis and release of histamine in the brain. An antagonist to
this receptor would lead to enhanced states of arousal and alertness. The
histamine H3 receptor antagonists may be useful in treating several disorders in
which general central nervous system arousal is desirable. An agonist to the
receptor may prove useful for treating disorders such as anxiety and insomnia.
To date, the Company has funded its Cognition Modulation program independently
of strategic partners and retains all of the worldwide commercial rights to any
products it develops. The Company, however, does not anticipate completing
clinical trials relating to its Cognition Modulation program without the
collaboration of a strategic partner. There can be no assurance that the Company
will be able to enter into an agreement with such a strategic partner for its
Cognition Modulation program on acceptable terms, if at all.
H3 Receptor Antagonists. The Company believes histamine H3 receptor
antagonists could provide a therapeutic approach for enhancing cognition and
positive behavior in patients with disorders characterized by
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memory and learning deficiencies. Such an agent could also be useful in arousing
patients with various forms of depression of the central nervous system such as
narcolepsy. The Company has discovered and developed a selective histamine H3
receptor antagonist, which has been shown in in vivo studies to be available to
the brain after oral administration and to selectively block the histamine H3
receptor in the brain. In preclinical studies, the histamine H3 antagonist
improves learning and memory and has potential advantages in both safety and
abuse potential and has a prolonged duration of action.
The Company has also developed and synthesized a chemical library of
more potent second generation H3 antagonist candidates. These second generation
histamine H3 receptor antagonists demonstrate improved in vitro receptor
selectivity profiles and enhanced potency. In preclinical models, these
candidates have also been shown to enter the brain and enhance histamine release
and are being tested for efficacy.
While there are currently available products for the treatment of the
conditions mentioned above, the Company is not aware of any such products based
on the histamine H3 receptor antagonists. The Company has received allowances of
certain U.S. patent applications that cover the compounds and use thereof. The
Company filed U.S. and PCT patent applications covering its second generation
histamine H3 receptor antagonists. The Company has received allowances for a
U.S. patent covering composition of matter for one series of the second
generation H3 antagonists.
H3 Receptor Agonists. The Company has also begun research on developing
a histamine H3 receptor agonist to reduce levels of wakefulness and arousal for
use in the treatment of anxiety and insomnia. It has developed several compounds
to date which have high affinity for the histamine H3 receptor and in animal
models have been shown to penetrate the blood brain barrier and occupy histamine
H3 receptors. The Company continues to synthesize and screen new compounds as
potential selective agonists at the histamine H3 receptor.
COMPETITION
The Company competes with both small biotechnology and established
pharmaceutical companies in all of its product development programs.
Furthermore, academic institutions, governmental agencies, and other public and
private research organizations also continue to conduct research, seek patent
protection, and establish collaborative arrangements with commercial entities
for product development and marketing. Products resulting from these activities
may compete directly with any products developed by the Company. These companies
and institutions also compete with the Company in recruiting and retaining
highly qualified scientific personnel.
Although the Company is not aware of any products on the market that
would directly compete with ADCON-L or ADCON-T/N, there are products which would
compete with another member of the ADCON family of products. One product,
Interceed(TM), has been marketed for several years by Johnson & Johnson to
prevent surgical adhesions following pelvic surgeries. Genzyme Corporation is
developing products to inhibit surgical adhesions following both pelvic and
abdominal surgeries and has received FDA approval for its Seprafilm(TM) product
for use in pelvic and abdominal surgeries. In addition, Lifecore Biomedical,
Inc. is conducting pivotal clinical studies for its surgical adhesion prevention
product, LUBRICOAT(TM), a hyaluronate- based gel for use in the gynecological
setting. There are significant efforts by others, including many large
pharmaceutical companies and academic institutions, to develop therapeutic
products which may compete with the products that are being developed by the
Company relating to its Alzheimer's Disease and Cognition Modulation programs.
Some of these products may be at a more advanced stage of development than the
Company's products. In addition, there may be substantial competition in the
biopharmaceutical and medical industries, both from specialized firms and from
major pharmaceutical, chemical, medical device and surgical supply companies.
Many of the Company's potential competitors have product development
capabilities and financial and human resources greater than the Company, and
have manufacturing, marketing, sales and distribution capabilities that the
Company does not have. Universities and other research institutions may develop
similar technologies and processes which, in some instances, may be utilized by
others to compete with the Company's products.
The Company expects to encounter significant competition for each of
its product candidates. To compete successfully the Company will be required to
develop and maintain scientifically advanced technology,
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develop proprietary products, attract and retain highly qualified personnel,
obtain patent or other protection for its products, obtain required regulatory
approvals and manufacture and successfully market its products, either alone or
through collaboration with third parties.
UNCERTAINTY OF HEALTH CARE REIMBURSEMENT. The Company's ability to
successfully commercialize its products will depend in part on the extent to
which reimbursement for the costs of such products and related treatments will
be available from government health administration authorities, private health
coverage insurers and other organizations. In addition, in both the U.S. and
elsewhere, sales of health care products are dependent on the availability of
reimbursement to the consumer from third-party payers, such as government and
private insurance plans. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and third-party payers are
increasingly challenging the prices charged for medical products and services.
There can be no assurance that ADCON products will be considered cost effective
and that reimbursement will be available or will be sufficient to allow the
Company to sell its products on a competitive basis. The Company's business may
be materially adversely affected by the continuing efforts of governmental and
third-party payers to contain or reduce the costs of health care through various
means. For example, in certain foreign markets the pricing or profitability of
health care products is subject to government control. In the U.S., there have
been, and the Company expects that there will continue to be, a number of
federal and state proposals to implement similar government control. While the
Company cannot predict whether any legislative or regulatory proposals or
reforms will be adopted, such proposals or reforms could have a material adverse
effect on the Company. If adequate coverage and reimbursement levels are not
provided by government and third-party payers for uses of the Company's
products, the market acceptance of these products could be adversely affected.
RESEARCH AND DEVELOPMENT
The Company is in the early stage of development of certain ADCON
products to complement ADCON-L and ADCON-T/N. The Company is also focusing on
the development of therapeutic products for use in the treatment of certain
nervous system disorders. Although several of these candidate therapeutic
products are in preclinical evaluation, the products currently under development
will require additional research and development, including preclinical and
extensive clinical testing, prior to making application with regulatory
authorities for commercial use. During fiscal 1996, the Company spent
approximately $6.1 million on research and development efforts. There can be no
assurance that the Company's research and development efforts will be successful
or that any candidate products will prove to be safe and effective in clinical
trials and receive necessary regulatory approvals.
GOVERNMENT REGULATION
U.S. Regulation. The manufacture and sale of the Company's products are
subject to regulation by numerous authorities, principally the FDA, and
corresponding state and foreign authorities. The regulatory process is lengthy,
expensive and uncertain. Prior to commercial sale in the United States, most
medical devices and new drugs, including the Company's products under
development, must be cleared or approved by the FDA. In addition, certain
material changes or modifications to medical devices and drugs are also subject
to FDA review and approval. Securing FDA clearances and approvals may require
the submission of extensive clinical data and supporting information to the FDA.
Product clearances and approvals can be withdrawn for failure to comply with
regulatory requirements or upon the occurrence of unforeseen problems following
initial marketing. The FDA and other agency requirements for manufacturing,
product testing and marketing also can vary depending on whether the product is
a medical device or new drug. There can be no assurance that the Company will be
able to obtain necessary regulatory clearances or approvals on a timely basis,
if at all, for any of its products under development, and delays in receipt or
failure to receive such clearances or approvals, the loss of previously received
clearances or approvals, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, regulatory clearances
or approvals for products such as medical devices and new drugs, even if
granted, may include significant limitations on the uses for which such products
may be marketed. Additionally, product clearances or approvals can be withdrawn
for failure to comply with regulatory requirements. In addition, certain
material changes to medical devices and drugs also are subject to FDA review
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and approval. There can be no assurance that any clearances or approvals that
are required, once obtained will not be withdrawn or that compliance with other
regulatory requirements can be maintained.
Manufacturers of medical devices and drugs also are required to adhere
to the FDA regulations setting forth requirements for GMP regulations and
similar requirements, in other countries, which include requirements relating to
product testing and quality assurance as well as the corresponding maintenance
of records and documentation. Failure to comply with applicable GMP or other
applicable regulatory standards, such as International Standard Organization's
("ISO"), could result in sanctions being imposed on the Company or the
manufacture of its products, including warning letters, fines, injunctions,
civil penalties, failure of the FDA or other regulatory authorities to grant
premarket clearance or premarket approval of medical devices and drugs,
operating restrictions and criminal prosecution. There can be no assurance that
the current manufacturer of the Company's products will comply with all
applicable regulatory requirements or that the Company would be able to identify
a new or additional manufacturers for its products on terms acceptable to the
Company. Since the Company's products are in research or development phases in
the United States, the Company cannot accurately predict all relevant regulatory
requirements or related issues. Changes in existing laws, regulations or
policies and the adoption of new laws, regulations or policies could prevent the
Company from, or could affect the timing of, achieving compliance with
regulatory requirements, including current and future regulatory clearances or
approvals, where necessary.
Other Regulation. The advertising of most of the FDA-regulated products
will be subject to Federal Trade Commission jurisdiction. The Company also is
subject to regulations by the Occupational Safety and Health Administration and
by the U.S. Environmental Protection Agency under such statutes as the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
laws. Various states and other foreign governments often have comparable health
and environmental laws.
Foreign Regulation. The Company is subject in many countries to
regulatory requirements concerning drugs and medical devices and relating to
human clinical trials, marketing approvals and product testing.
From January 1, 1995, the European Union has implemented the Medical
Devices Directive (MDD). This new legislation includes, among others,
requirements with respect to the design, safety, performance and manufacture of
products. Under the system established by the MDD, all medical devices other
than active implants and in vitro diagnostic products must quality for CE
Marking by June 14, 1998. During the transitional period (from January 1, 1995
to June 14, 1998) medical devices can be placed on the market and put into
service if they comply with the requirements of the MDD or national requirements
that were in force on December 31, 1994.
In order to qualify for CE Marking, the manufacturer must comply with
the Essential Requirements of the MDD. These relate to safety and performance.
In order to demonstrate compliance with these requirements of the MDD, the
manufacturer must undergo conformity assessment which depends on the class of
the product. The Company has chosen as its conformity assessment type testing of
the product by a Notified Body and assessment of the manufacturer's quality
system used in production by a Notified Body. The Notified Body chosen by the
Company is a Dutch non-governmental entity which, after an accreditation
proceeding, has been notified by the Dutch Competent Authority to the European
Commission that it may carry out conformity assessment tasks under the MDD. Once
all the necessary conformity assessment tasks have been completed to the
satisfaction of the Notified Body and the manufacturer is convinced that it is
in full compliance with the MDD, CE Marking may be affixed on the products
concerned.
Although member countries must accept for marketing medical devices
bearing a CE Marking without imposing further requirements related to product
safety and performance, each country may require the use of its own language on
labels and instructions for use. National Competent Authorities who are required
to enforce compliance with the requirements of the MDD, can restrict, prohibit
and recall CE marked products if they are unsafe. Such a decision must be
confirmed by the European Commission in order to be valid. Member countries can
impose additional requirements as long as they do not violate the MDD or
constitute technical barriers to trade.
-8-
<PAGE> 11
Within the European Union, premarket compliance for devices must be
supported by clinical data of a type and extent set out by European Union
directives, standards as interpreted by Competent Authorities and Notified
Bodies. The approval process for the commencement of clinical trials varies
currently from country to country. To the extent possible, the Company conducted
clinical trials are designed to develop a regulatory package sufficient for
multi-country European Union approval, without the need to duplicate clinical
trials for individual country approvals.
The new post-1994 regimes for medical devices are based on directives.
Devices will be subject to, in addition to other future European Union or other
countries legislation, continued national regulation on pricing and
reimbursement, which may vary from country to country. Certain other
requirements such as clinical investigations and post marketing surveillance,
will probably be subject to significant variation among countries.
PATENTS, TRADEMARKS AND TRADE SECRETS
Proprietary protection for the Company's product candidates, processes,
and know-how is important to the Company's business. The Company's policy is to
file patent applications to protect technology, inventions and improvements
that are considered important to the development of its business. The Company
also relies upon trade secrets, know-how and continuing technological
innovation to develop and maintain its competitive position. The Company intends
to aggressively prosecute and defend its patents and proprietary technology.
The Company has filed U.S. and corresponding foreign patent
applications relating to its product candidates in the ADCON family. These
applications cover various methods of use and pharmaceutical compositions. U.S.
Patent No. 5,605,938 issued on February 25, 1997. This patent has claims
covering ADCON products and methods for inhibiting fibrosis. The Company is also
pursuing broader and additional claims in various applications that cover
methods of the use of related products and their pharmaceutical compositions.
Two of these applications have been allowed. The Company is not aware that its
manufacture, use and/or sale of its ADCON products infringes any valid claim of
any issued patents. There can be no assurance, however, that infringement of
such claims will not be found to exist. See "Business -- ADCON Research and
License Agreements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Company has received allowances for two U.S. patent applications
that are licensed to the Company from the University of Toledo. These allowed
applications relate to a first series of synthetic compounds that are histamine
H3 receptor antagonists, to methods of use and to pharmaceutical compositions
comprising these compounds. A U.S. patent licensed to the Company from the
University of Toledo has also issued that covers processes for the manufacture
of intermediates for certain of the compounds. In addition, the Company jointly
owns a U.S. Patent with the University of Toledo that relates to the use of the
first series of synthetic compounds as appetite suppressants.
Three further U.S. patent applications filed solely by the Company and
certain corresponding foreign applications, covering two different series of
synthetic H3 receptor antagonist compounds, and one series of H3 receptor
agonist compounds, their methods of medical use and pharmaceutical compositions,
are pending. A U.S. patent application covering one series of synthetic H3
receptor antagonist compounds has been allowed for claims of composition of
matter. No assurance can be given that any claims relating to these products and
methods will be issued.
A U.S. patent has been issued to Institut National de la Sante et de la
Recherche Medicale ("INSERM"), Societe Civile Bioprojet, and Universite de Caen
(the "INSERM patent") covering certain histamine H3, receptor antagonists
including some of the compounds in one of the Company's allowed U.S. patent
applications licensed from the University of Toledo. The INSERM patent has an
earlier effective filing date than that of the Company's histamine H3,
receptor antagonist application relating to this series of compounds. However,
the Company believes the its date of invention for the pertinent compounds may
be earlier that the date of invention to which the INSERM application is
entitled in the U.S. for purposes of an interference proceeding. However,
should such an interference proceeding be declared prior to issuance of the
Company's application, there can be no assurance that the Company would
prevail. If the Company's allowed patent application, which may claim some of
the same subject matter as the INSERM patent, issues as expected, either patent
owner can bring a civil action to determine the validity of the potentially
interfering patents. There can be no assurance that such an action will not be
instituted, and if instituted, there can be no assurance that the Company
would prevail.
-9-
<PAGE> 12
The Company is prosecuting its patent applications with the U.S. Patent
and Trademark Office and with various foreign patent offices but the Company
does not know whether any of its applications will result in the issuance of any
patents or, if any patents are issued, whether any issued patent will provide
significant proprietary protection or will be circumvented or invalidated.
During the course of patent prosecution, patent applications are evaluated,
inter alia, for utility, novelty, nonobviousness and enablement. The U.S. Patent
and Trademark Office may require that the claims of an initially filed patent
application be amended if it is determined that the scope of the claims includes
subject matter that is not useful, novel, nonobvious or enabled. Furthermore, in
certain instances, the practice of a patentable invention may require a license
from the holder of dominant patent rights. In cases where one party believes
that it has a claim to an invention covered by a patent application or patent of
a second party, the first party may provoke an interference proceeding in the
U.S. Patent and Trademark Office or such a proceeding may otherwise be declared
by the Patent and Trademark Office. In general, in an interference proceeding,
the Patent and Trademark Office would review the competing patents and/or patent
applications to determine the validity of the competing claims, including but
not limited to determining priority of invention. Any such determination would
be subject to appeal in the appropriate U.S.
federal courts.
There can be no assurance that additional patents will be obtained by
the Company or that issued patents will provide a substantial protection or be
of commercial benefit to the Company. The issuance of a patent is not conclusive
as to its validity or enforceability, nor does it provide the patent holder with
freedom to operate without infringing the patent rights of others. A patent
could be challenged by litigation and, if the outcome of such litigation were
adverse to the patent holder, competitors could be free to use the subject
matter covered by the patent, or the patent holder may license the technology to
others in settlement of such litigation. The invalidation of key patents owned
by or licensed to the Company or non-approval of pending patent applications
could create increased competition, with potential adverse effects on the
Company and its business prospects. In addition, there can be no assurance that
any applications of the Company's technology will not infringe patents or
proprietary rights of others or that licenses that might be required as a result
of such infringement for the Company's processes or products would be available
on commercially reasonable terms, if at all.
The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which could
result in substantial cost to the Company, may also be necessary to enforce the
Company's patent and proprietary rights and/or to determine the scope and
validity of others' proprietary rights. The Company may participate in
interference proceedings that may in the future be declared by the U.S. Patent
and Trademark Office to determine priority of invention, which could result in
substantial cost to the Company. There can be no assurance that the outcome of
any such litigation or interference proceedings will be favorable to the Company
or that the Company will be able to obtain licenses to technology that it may
require or that, if obtainable, such technology can be licensed at a reasonable
cost.
The patent position of biotechnology and biopharmaceutical firms
generally is highly uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth
-10-
<PAGE> 13
of claims allowed in biotechnology and biopharmaceutical patents. Accordingly,
there can be no assurance that patent applications owned or licensed by the
Company will result in patents being issued or that, if issued, the patents will
afford protection against competitors with similar technology.
The Company also attempts to protect its proprietary compounds,
products and processes by relying on trade secret laws, and on non-disclosure
and confidentiality agreements. The Company requires its employees, consultants,
members of the Scientific Advisory Board, outside scientific collaborators and
sponsored researchers, and other advisors to execute confidentiality agreements
upon the commencement of employment or consulting relationships with the
Company. These agreements generally provide that all confidential information
developed or made known to the individual during the course of the relationships
is to be kept confidential and not disclosed to third parties except in specific
circumstances. In the case of employees, the agreements provide that any
inventions conceived by the individual within the scope of his employment shall
be the exclusive property of the Company. There can be no assurance, however,
that these agreements will provide meaningful protection for any of the
Company's trade secrets in the event of unauthorized use or disclosure of such
information.
EMPLOYEES
As of December 31, 1996, the Company had 52 full-time employees. Of the
52 full-time employees, 36 are engaged in, or directly support, research and
development.
ITEM 2. PROPERTIES.
The Company's personnel conduct the Company's internal research at a
35,705 square foot leased facility in Beachwood, Ohio, a suburb of Cleveland.
The leases for 11,569, 9,140, 13,000 and 1,996 square feet of space in this
facility expire on December 31, 1998, December 31, 2001, December 31, 2001 and
December 31, 2001, respectively, subject to an option to renew the leases for
one additional term. The renewal option for the total 35,705 square feet is
until December 31, 2001. The Company currently subleases a 4,600 square foot
portion of this space.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The information under this Item 4A is furnished pursuant to Instruction
3 to Item 401(b) of Regulation S-K.
THOMAS O. OESTERLING, PH.D. Dr. Oesterling has served as President, Chief
Executive Officer and a Director of the Company since June 1989. From 1984 to
1986, he was Senior Vice President Research and Development of Collaborative
Research, Inc., a manufacturer of diagnostic reagents for genetic research and
testing, and from 1986 to 1989, he was President. Prior to 1984, Dr. Oesterling
had 18 years of experience in pharmaceutical and medical management and research
and development for the Upjohn Company, Johnson & Johnson, and Mallinckrodt Inc.
Dr. Oesterling received his Ph.D. in Pharmaceutical Chemistry from The Ohio
State University. Dr. Oesterling is 58 years old.
RODNEY E. DAUSCH. Rodney E. Dausch joined the Company as Vice President and
Chief Financial Officer in March 1995. In August 1995, Mr. Dausch was elected
Secretary of the Company. Prior to joining the Company and since February 1994,
Mr. Dausch was Vice President of Finance and Administration of Oncologix, Inc.,
a biopharmaceutical company. From May 1987 to January 1994, he was Vice
President of Finance and Administration of Oncor, Inc., a manufacturer of
diagnostic products for detection of cancer diseases. Prior to
-11-
<PAGE> 14
1987 he held the position of Vice President of Finance and Administration with
CPM Group, Inc. and Bethesda Research Laboratories, Inc. Mr. Dausch holds a B.S.
in Accounting from Loyola College and is a Certified Public Accountant in the
State of Maryland. Mr. Dausch is 52 years old.
JON D. SCHOELER. Jon D. Schoeler has served as Vice President, Worldwide Sales
and Marketing since July 1996. Prior to joining the Company, and since August
1995, Mr. Schoeler was Director, Worldwide Sales and Marketing at St. Jude
Medical, a biopharmaceutical company. From January 1991 to January 1995, he was
Vice President of Sales and Marketing of American Cyanamid, a manufacturer of
medical devices. Mr. Schoeler is 47 years old.
MICHAEL A. ZUPON, PH.D. Dr. Zupon has served as Vice President, Product
Development and Operations since June 1993. Prior to joining the Company, Dr.
Zupon had 12 years of experience in a variety of product development positions
at Schering-Plough Corporation, a pharmaceutical company, most recently as
Director, Drug Delivery and Technology Assessment from January 1991 to June 1993
and as Director, Pharmaceutical Process Development from April 1988 to January
1991. Dr. Zupon received his Bachelor of Science and Ph.D. degrees from the
University of Utah College of Pharmacy and also received a Master of Business
Administration degree from the University of Utah Graduate School of Business.
Dr. Zupon is 42 years old.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by Item 5 is set forth at page 25 of the
Annual Report, which information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by Item 6 is set forth at page 9 of the
Annual Report, which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by Item 7 is set forth at pages 10 through 12
of the Annual Report, which information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is set forth at pages 13 through 24
of the Annual Report, which information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information with respect to Directors of the Company is set forth in
the Proxy Statement on pages 2 through 3 under the heading "Election of
Directors," which information is incorporated herein by reference. Information
regarding the executive officers of the Company is included as Item 4A of Part I
of this Annual Report on Form 10-K as permitted by Instruction 3 to Item 401(b)
of Regulation S-K.
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<PAGE> 15
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is set forth in the
Proxy Statement on pages 5 through 7 under the heading "Compensation of
Executive Officers," which information is incorporated herein by reference
(except for the Compensation Committee Report on Executive Compensation and the
Comparative Stock Performance Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial
owners and management is set forth in the Proxy Statement on pages 4 through 5
under the heading "Beneficial Ownership of Common Stock," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This Item is inapplicable. No disclosure is set forth with respect to
this Item in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report
on Form 10-K.
1. Financial Statements. The following consolidated financial
statements of the Company and its subsidiaries and the report
of independent auditors thereon, included in the Annual Report
on pages 13 through 24, are incorporated by reference in Item
8:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1995 and 1996.
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and for the period from
inception of operations (August 31, 1988) through December 31,
1996.
Consolidated Statements of Changes in Stockholders' Equity for
the period from inception of operations (August 31, 1988)
through December 31, 1988 and for the years ended December 31,
1989, 1991, 1992, 1993, 1994, 1995 and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and for the period from
inception of operations (August 31, 1988) through December 31,
1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules. All schedules for which
provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore are
omitted.
3. Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------------------------------
3.1(i) Second Restated Certificate of Incorporation of the Company is
incorporated hereby by reference to Exhibit 4(a) of the Company's
Form S-8 Registration Statement with respect to the 1995
Nonemployee Directors Stock Option Plan filed January 18, 1996
(Registration No. 333-00408).
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<PAGE> 16
(ii) Amended and Restated By-Laws of the Company are incorporated herein by
reference to Exhibit 4(b) of the Company's Form S-8 Registration
Statement with respect to the 1995 Nonemployee Directors Stock Option
Plan filed January 18, 1996 (Registration Statement No. 333-00408).
10.1 Lease Agreements, as amended, between Gliatech R&D, Inc. and Commerce
Corner Associates (facility lease) which is guaranteed by the Company
is incorporated by reference to Exhibit 10.1 of the Company's Form S-1
Registration Statement filed September 1, 1995 (Registration No. 33-
96460).
10.2 Master Lease and Warrant Agreement between the Company and Pacificorp
Credit, Inc. d/b/a Pacific Venture Finance, Inc., dated October 15,
1990, and Amendment No. 1, dated October 15, 1991 (equipment lease
line) is incorporated by reference to Exhibit 10.2 of the Company's
Form S-1 Registration Statement filed September 1, 1995 (Registration
No. 33-96460).
10.3 Sublease between Gliatech R&D, Inc. and Spectrum Surgical Instruments
Corporation, dated November 7, 1994 is incorporated by reference to
Exhibit 10.3 of the Company's Form S-1 Registration Statement filed
September 1, 1995 (Registration No. 33-96460).
10.4 Master Commercial Demand Note of the Company to National City Bank,
dated September 11, 1996.
10.5 Research Agreements between the Company and Case Western Reserve
University, dated as of August 31, 1988 and September 1, 1991 is
incorporated by reference to Exhibit 10.5 of the Company's Form S-1
Registration Statement filed September 1, 1995 (Registration No.
33-96460).
10.6 License Agreements between the Company and Case Western Reserve
University, dated as of August 31, 1988 and September 1, 1991 is
incorporated by reference to Exhibit 10.6 of the Company's Form S-1
Registration Statement filed September 1, 1995 (Registration No.
33-96460).
*10.7 Employment letter between the Company and Thomas O. Oesterling, Ph.D.,
dated May 19, 1989 is incorporated by reference to Exhibit 10.7 of the
Company's Form S-1 Registration Statement filed September 1, 1995
(Registration No. 33-96460).
*10.8 Employment letter between the Company and Mr. Rodney E. Dausch, dated
February 7, 1995 is incorporated by reference to Exhibit 10.9 of the
Company's Form S-1 Registration Statement filed September 1, 1995
(Registration No. 33-96460).
*10.9 The Company's Amended and Restated 1989 Stock Option Plan is
incorporated by reference to Exhibit 10.10 of the Company's Amendment
No. 1 to Form S-1 Registration Statement filed September 22, 1995
(Registration No. 33-96460).
*10.10 The Company's 1992 Directors Stock Option Plan is incorporated by
reference to Exhibit 10.11 of the Company's Form S-1 Registration
Statement filed September 1, 1995 (Registration No. 33- 96460).
*10.11 The Company's 1995 Nonemployee Directors Stock Option Plan is
incorporated by reference to Exhibit 4(c) of the Company's Form S-8
Registration Statement with respect to the 1995 Nonemployee Directors
Stock Option Plan filed January 18, 1996 (Registration No. 333-00408).
10.12 Manufacturing Agreement between the Company and European Medical
Contract Manufacturing, dated October 10, 1994 (certain portions of
this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a grant of confidential
treatment) is incorporated by reference to Exhibit 10.12 of the
Company's Amendment No. 2 to Form S-1 Registration Statement filed
October 10, 1995 (Registration No. 33-96460).
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<PAGE> 17
10.13 Form of Distribution Agreement between the Company and various of its
distributors is incorporated by reference to Exhibit 10.13 of the
Company's Amendment No. 1 to Form S-1 Registration Statement filed
September 22, 1995 (Registration No. 33-96460).
10.14 Agreement between the Company and Janssen Pharmaceutica, N.V., dated
October 14, 1994 (certain portions of this exhibit have been omitted
and filed separately with the Securities and Exchange Commission
pursuant to a grant of confidential treatment) is incorporated by
reference to Exhibit 10.14 of the Company's Amendment No. 2 to Form
S-1 Registration Statement filed October 10, 1995 (Registration No.
33-96460).
10.15 First Addendum to Agreement between the Company and Janssen
Pharmaceutica, N.V., dated September 1, 1995 (certain portions of this
exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a grant of confidential treatment) is
incorporated by reference to Exhibit 10.16 of the Company's Amendment
No. 2 to Form S-1 Registration Statement filed October 10, 1995
(Registration No. 33-96460).
10.16 Warrant to purchase Common Stock issued to Montgomery Securities is
incorporated by reference to Exhibit 4.5 of the Company's Form S-1
Registration Statement filed September 1, 1995 (Registration No.
33-96460).
10.17 Warrant to purchase Common Stock issued to Vector Securities
International, Inc. is incorporated by reference to Exhibit 4.6 of the
Company's Form S-1 Registration Statement filed September 1, 1995
(Registration No. 33-96460).
10.18 Seventh Amended and Restated Rights of First Refusal, Co-Sale and
Registration Rights Agreement is incorporated by reference to Exhibit
4.8 of the Company's Amendment No. 2 to Form S-1 Registration
Statement filed October 10, 1995 (Registration No. 33-96460).
10.19 Amended Form of Distribution Agreement between the Company and various
of its distributors.
*10.20 Employment letter between the Company and Michael A. Zupon, Ph.D.,
dated April 19, 1993.
*10.21 Employment letter between the Company and Mr. Jon D. Schoeler dated
June 27, 1996.
11.1 Statement regarding computation of per-share loss.
13.1 1996 Annual Report.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.
- ----------
* Reflects management contract or other compensatory arrangement required to
be filed as an exhibit pursuant to Item 14(c) of this Form 10-K.
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<PAGE> 18
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
GLIATECH INC.
BY: /s/ Thomas O. Oesterling, Ph.D.
-----------------------------------
Thomas O. Oesterling, Ph.D.
President and Chief Executive Officer
DATE: MARCH 31, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Thomas O. Oesterling, Ph.D.
- ---------------------------------
Thomas O. Oesterling, Ph.D. President and Chief Executive
Officer (Principal Executive
Officer) and Director March 31, 1997
*
- ---------------------------------
Rodney E. Dausch Vice President and Chief
Financial Officer
(Principal Financial Officer) March 31, 1997
*
- ---------------------------------
Karen Diedrich Controller
(Principal Accounting Officer) March 31, 1997
*
- ---------------------------------
Robert P. Pinkas Chairman of the Board March 31, 1997
*
- ---------------------------------
Allen H. Ford Director March 31, 1997
*
- ---------------------------------
Theodore E. Haigler, Jr. Director March 31, 1997
*
- ---------------------------------
Robert D. Pavey Director March 31, 1997
*
- ---------------------------------
Irving S. Shapiro Director March 31, 1997
*
- ---------------------------------
John L. Ufheil Director March 31, 1997
<FN>
* The undersigned, by signing his name hereto, does sign and execute this
Annual Report on Form 10-K pursuant to the Powers of Attorney executed by
the above-named officers and Directors of the Company and filed with the
Securities and Exchange Commission on behalf of such officers and Directors.
</TABLE>
By:/s/ Thomas O. Oesterling, Ph.D.
--------------------------------------------
THOMAS O. OESTERLING, PH.D., ATTORNEY-IN-FACT
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<PAGE> 19
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
- ----------- ------------------- --------
3.1(i) Second Restated Certificate of Incorporation of
the Company is incorporated hereby by reference to
Exhibit 4(a) of the Company's Form S-8
Registration Statement with respect to the 1995
Nonemployee Directors Stock Option Plan filed
January 18, 1996 (Registration No. 333-00408).
(ii) Amended and Restated By-Laws of the Company are
incorporated herein by reference to Exhibit 4(b)
of the Company's Form S-8 Registration Statement
with respect to the 1995 Nonemployee Directors
Stock Option Plan filed January 18, 1996
(Registration Statement No. 333-00408).
10.1 Lease Agreements, as amended, between Gliatech
R&D, Inc. and Commerce Corner Associates (facility
lease) which is guaranteed by the Company is
incorporated by reference to Exhibit 10.1 of the
Company's Form S-1 Registration Statement filed
September 1, 1995 (Registration No. 33-96460).
10.2 Master Lease and Warrant Agreement between the
Company and Pacificorp Credit, Inc. d/b/a Pacific
Venture Finance, Inc., dated October 15, 1990, and
Amendment No. 1, dated October 15, 1991 (equipment
lease line) is incorporated by reference to
Exhibit 10.2 of the Company's Form S-1
Registration Statement filed September 1, 1995
(Registration No. 33-96460).
10.3 Sublease between Gliatech R&D, Inc. and Spectrum
Surgical Instruments Corporation, dated November
7, 1994 is incorporated by reference to Exhibit
10.3 of the Company's Form S-1 Registration
Statement filed September 1, 1995 (Registration
No. 33-96460).
10.4 Master Commercial Demand Note of the Company to
National City Bank, dated September 11, 1996.
10.5 Research Agreements between the Company and Case
Western Reserve University, dated as of August 31,
1988 and September 1, 1991 is incorporated by
reference to Exhibit 10.5 of the Company's Form
S-1 Registration Statement filed September 1, 1995
(Registration No. 33- 96460).
10.6 License Agreements between the Company and Case
Western Reserve University, dated as of August 31,
1988 and September 1, 1991 is incorporated by
reference to Exhibit 10.6 of the Company's Form
S-1 Registration Statement filed September 1, 1995
(Registration No. 33- 96460).
*10.7 Employment letter between the Company and Thomas
O. Oesterling, Ph.D., dated May 19, 1989 is
incorporated by reference to Exhibit 10.7 of the
Company's Form S-1 Registration Statement filed
September 1, 1995 (Registration No. 33-96460).
X-1
<PAGE> 20
Exhibit No. Exhibit Description Page No.
- ----------- ------------------- --------
*10.8 Employment letter between the Company and Mr.
Rodney E. Dausch, dated February 7, 1995 is
incorporated by reference to Exhibit 10.9 of the
Company's Form S-1 Registration Statement filed
September 1, 1995 (Registration No. 33-96460).
*10.9 The Company's Amended and Restated 1989 Stock
Option Plan is incorporated by reference to
Exhibit 10.10 of the Company's Amendment No. 1 to
Form S-1 Registration Statement filed September
22, 1995 (Registration No. 33-96460).
*10.10 The Company's 1992 Directors Stock Option Plan is
incorporated by reference to Exhibit 10.11 of the
Company's Form S-1 Registration Statement filed
September 1, 1995 (Registration No. 33-96460).
*10.11 The Company's 1995 Nonemployee Directors Stock
Option Plan is incorporated by reference to
Exhibit 4(c) of the Company's Form S-8
Registration Statement with respect to the 1995
Nonemployee Directors Stock Option Plan filed
January 18, 1996 (Registration No. 333-00408).
10.12 Manufacturing Agreement between the Company and
European Medical Contract Manufacturing, dated
October 10, 1994 (certain portions of this exhibit
have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a
grant of confidential treatment) is incorporated
by reference to Exhibit 10.12 of the Company's
Amendment No. 2 to Form S-1 Registration Statement
filed October 10, 1995 (Registration No.
33-96460).
10.13 Form of Distribution Agreement between the Company
and various of its distributors is incorporated by
reference to Exhibit 10.13 of the Company's
Amendment No. 1 to Form S-1 Registration Statement
filed September 22, 1995 (Registration No.
33-96460).
10.14 Agreement between the Company and Janssen
Pharmaceutica, N.V., dated October 14, 1994
(certain portions of this exhibit have been
omitted and filed separately with the Securities
and Exchange Commission pursuant to a grant of
confidential treatment) is incorporated by
reference to Exhibit 10.14 of the Company's
Amendment No. 2 to Form S-1 Registration Statement
filed October 10, 1995 (Registration No.
33-96460).
10.15 First Addendum to Agreement between the Company
and Janssen Pharmaceutica, N.V., dated September
1, 1995 (certain portions of this exhibit have
been omitted and filed separately with the
Securities and Exchange Commission pursuant to a
grant of confidential treatment) is incorporated
by reference to Exhibit 10.16 of the Company's
Amendment No. 2 to Form S-1 Registration Statement
filed October 10, 1995 (Registration No.
33-96460).
10.16 Warrant to purchase Common Stock issued to
Montgomery Securities is incorporated by reference
to Exhibit 4.5 of the Company's Form S-1
Registration Statement filed September 1, 1995
(Registration No. 33- 96460).
X-2
<PAGE> 21
Exhibit No. Exhibit Description Page No.
- ----------- ------------------- --------
10.17 Warrant to purchase Common Stock issued to Vector
Securities International, Inc. is incorporated by
reference to Exhibit 4.6 of the Company's Form S-1
Registration Statement filed September 1, 1995
(Registration No. 33-96460).
10.18 Seventh Amended and Restated Rights of First
Refusal, Co-Sale and Registration Rights Agreement
is incorporated by reference to Exhibit 4.8 of the
Company's Amendment No. 2 to Form S-1 Registration
Statement filed October 10, 1995 (Registration No.
33-96460).
10.19 Amended Form of Distribution Agreement between the
Company and various of its distributors.
*10.20 Employment letter between the Company and Michael
A. Zupon, Ph.D., dated April 19, 1993.
*10.21 Employment letter between the Company and Mr. Jon
D. Schoeler dated June 27, 1996.
11.1 Statement regarding computation of per-share loss.
13.1 1996 Annual Report.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
X-3
<PAGE> 1
Exhibit 10.4
<TABLE>
<CAPTION>
<S> <C> <C>
FOR BANK USE ONLY
COMMERCIAL DEMAND NOTE (Simple/Grid) Debtor Name Gliatech Inc.
-------------
(Ohio version) 00725-6 (3/83) INV. 803279 (03/83) Debtor # 2211345769
----------------
Obligation #
-------------
Office Metro/Ohio
-------------------
</TABLE>
================================================================================
Amount City, State Date
$1,500,000.00 Cleveland, Ohio September 11, 1996
------------------------ --------------------------------- ------------------
- --------------------------------------------------------------------------------
ON DEMAND, for value received, the undersigned ("Debtor") promises to pay to the
order of National City ("Bank"), which has its principal place of business in
Cleveland, Ohio. at any office of Bank, One million five hundred thousand and
00/100 DOLLARS (or, if less, the unpaid principal balance shown on an attachment
to this note or on Bank's loan account records) in lawful money of the United
States, together with interest payable commencing on ___________________, 1996,
and Monthly thereafter and on demand. Prior to demand, principal and any overdue
interest shall bear interest computed daily (on the basis of a 360-day year and
actual days elapsed) at a fluctuating rate which is zero percent (0%) per annum
above the Prime Rate.
_______________ Debtor is not permitted to obtain advances other than the
Initials initial amount borrowed hereunder.
OR
This note represents an arrangement that allows Debtor to
obtain advances without giving Bank a separate note for each
advance. However, THIS NOTE DOES NOT OF ITSELF CONSTITUTE A
COMMITMENT BY BANK TO MAKE ANY ADVANCES TO DEBTOR. Bank will
record the date and amount of each advance on an attachment to
_______________ this note or on Bank's loan account records. Debtor agrees
Initials that each advance so recorded shall be prima facie evidence
that an advance was made on the date and in the amount
indicated. The number of advances and the amount of each
advance are not limited; provided, however, that the maximum
unpaid principal balance outstanding at any time shall not
exceed the face amount of this note.
If Debtor fails to pay any amount due hereunder, or any fee in connection
herewith, in full within ten (10) days after its due date or the date of demand
therefor, whichever is applicable, Debtor, in each case, will incur and shall
pay a late fee equal to the greater of twenty dollars ($20.00) or five percent
(5%) of the unpaid amount. The payment of a late charge will not impair any
holder's right to demand repayment of this note.
Except as otherwise agreed in writing, payments will be applied first to accrued
but unpaid interest and fees, in that order, on an invoice by invoice basis in
the order of their respective due dates, until paid in full, then to late
charges and then to principal.
In its discretion, Bank may, from time to time, unilaterally change any
provision for the application of payments by mailing a written notice to Debtor
of the change. The notice shall be mailed to the address indicated herein or
such other address that Debtor may furnish in writing to an appropriate officer
of Bank and shall be mailed not less than fifteen (15) days prior to the
effective date of such change.
If this note is not paid in full on demand, the interest rate otherwise in
effect hereunder shall be increased by three percent (3%) per annum, provided
that in no event shall the principal of and interest on this note bear interest
after demand at a rate less than the interest rate actually in effect hereunder
immediately after demand.
In this note, (a) Debt means, collectively, all monetary liabilities, and any
charges or expenses incurred in connection therewith, now or hereafter owing by
the Person or Persons in question, including, without limitation, every such
liability whether owing by such Person or one (1) of such Persons alone or
jointly, severally or jointly and severally, whether owing absolutely or
contingently, or directly or indirectly, and whether created by loan, overdraft,
guaranty or other contract or by quasi-contract, tort, statute or other
operation of law; (b) Bank Debt means Debt payable to Bank, whether initially
payable to Bank or acquired by Bank by purchase, pledge or otherwise and whether
assigned to or participated to or from Bank in whole or in part; (c) Prime Rate
means the fluctuating rate of interest which is publicly announced from time to
time by Bank at its principal place of business as being its "prime rate" or
"base rate" thereafter in effect, with each change in the Prime Rate
automatically, immediately and without notice changing the fluctuating interest
rate thereafter applicable hereunder, it being agreed that the Prime Rate is not
necessarily the lowest rate of interest then available from Bank on fluctuating
rate loans; (d) Obligor means any Person who is or shall become obligated or
whose property is or shall serve as collateral for the payment of Debtor's Bank
Debt or any part thereof in any manner and, in addition to Debtor, includes,
without limitation, any maker, endorser, guarantor, subordinating creditor,
assignor, pledgor, mortgagor or hypothecator of property; (e) Related Writing
means a writing of any form or substance signed by any Obligor (whether as
principal or agent) or by any attorney, accountant or other representative of
any Obligor and received by Bank in respect of Debtor's Bank Debt or any part
thereof, including, without limitation, any credit application, credit
agreement, reimbursement agreement, financial statement, promissory note,
guaranty, indenture, mortgage, security agreement, authorization, subordination
agreement, certificate, opinion or any similar writing, but shall not include
any commitment letter issued by Bank, without regard to whether Debtor or any
other Person signed or acknowledged receipt thereof; and (f) Person means a
natural person or entity of any kind, including, without limitation, any
corporation, partnership, trust, governmental body or any other form or kind of
entity.
Debtor certifies to Bank that all funds disbursed under this note will be used
for business or commercial purposes.
Debtor and the undersigned guarantors, if any, hereby authorize Bank to share
all credit and financial information relating to Debtor and the undersigned
guarantors, if any, with Bank's parent company, and with any subsidiary or
affiliate company of Bank or of Bank's parent company.
In no event shall the interest rate in effect on this note exceed the maximum
rate permissible under the law governing this note.
If Debtor consists of more than one Person, Debtor shall be jointly and
severally liable on this note.
Any holder's delay or omission in the exercise of any right under this note
shall not operate as a waiver of that right or of any other right under this
note.
X-4
<PAGE> 2
If any provision of this note is determined by a court of competent jurisdiction
to be invalid, illegal or unenforceable, that determination shall not affect any
other provision of this note, and each such other provision shall be construed
and enforced as if the invalid, illegal or unenforceable provision were not
contained herein.
This note and the Related Writings set forth the entire agreement between the
parties regarding the transactions contemplated hereby, and supersede all prior
agreements, commitments, discussions, representations and understandings,
whether written or oral, and any and all contemporaneous oral agreements,
commitments, discussions, representations and understandings between the parties
relating to the subject matter hereof.
No amendment, modification or supplement to this note or any Related Writing
shall be binding unless executed in writing by all parties thereto, and this
provision shall not be subject to wavier by any party and shall be strictly
enforced.
This note shall be governed by the law of the state in which Bank has its
principal place of business.
Debtor and the undersigned guarantors, if any, jointly and severally authorize
any attorney-at-law to appear in any state or federal court of record in the
Untied States after demand; to waive the issuance and service of process; to
confess judgment against Debtor and/or any undersigned guarantor in favor of the
holder of this note for the amount then appearing due, together with interest
and costs of suit; and to release all errors and waive all rights of appeal and
stay of execution. If any judgment against Debtor and/or any undersigned
guarantor is vacated for any reason, this warrant of attorney may be used to
obtain additional judgments.
- --------------------------------------------------------------------------------
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
- --------------------------------------------------------------------------------
Address and Telephone:
Gliatech, Inc.
- --------------------------------------------------------------------------------
23420 Commerce Park Rd. Debtor
Cleveland, Ohio 44122 By /s/ Rodney E. Dausch
- --------------------------------------------------------------------------------
Vice President of Finance
Debtor
- --------------------------------------------------------------------------------
By
- --------------------------------------------------------------------------------
FOR VALUE RECEIVED, each undersigned guarantor (a) consents to the provisions of
the note, including, without limitation, the warrant of attorney; (b)
guarantees, absolutely and unconditionally, and jointly and severally with the
other undersigned guarantors, if any, the prompt payment in full of the note
(and any extensions thereof in whole or in part) when due and whether or not the
holder of the note shall resort or shall have resorted to any other Obligor or
to security, if any; (c) waives presentment, demand for payment, notice of
dishonor and every other kind of notice to which the undersigned guarantor might
be entitled but for this waiver; and (d) waives any and all claims, rights or
remedies the undersigned guarantor may now have or hereafter acquire against
Debtor that arises from the undersigned guarantor's performance hereunder or is
in any way related hereto, including, without limitation, subrogation,
reimbursement, contribution or indemnification, whether direct or indirect or
arising by contract, law, equity or otherwise; and (e) agrees that the liability
of the undersigned guarantor(s) shall not be affected by any act, omission or
course of dealing on the part of the holder including, without limitation, any
extension of time, any release or exchange of security (irrespective of the
consideration, if any, received therefor) or any other indulgence granted to any
Obligor, in each case whether with or without notice to the undersigned
guarantor(s).
- --------------------------------------------------------------------------------
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
- --------------------------------------------------------------------------------
Address and Telephone:
- --------------------------------------------------------------------------------
Guarantor
By
- --------------------------------------- ---------------------------------------
- --------------------------------------------------------------------------------
Guarantor
By
- --------------------------------------- ---------------------------------------
X-5
<PAGE> 1
Exhibit 10.19
DISTRIBUTION AGREEMENT
This AGREEMENT dated and executed ______________________, 199_ between
Gliatech Inc., a corporation organized and existing under the laws of the State
of Delaware of the United States of America, with offices at 23420 Commerce Park
Road, Cleveland, OH, USA 44122 (hereinafter "Gliatech") and ________________, a
company organized and existing under the laws of _________, with offices at
____________________ (hereinafter "Distributor").
WHEREBY IT IS AGREED AS FOLLOWS:
1. APPOINTMENT: Gliatech hereby appoints Distributor as its
exclusive distributor throughout _______ (hereinafter "Territory"),
and Distributor hereby accepts the appointment for the product(s)
listed on Appendix I.A. attached hereto, as the same may be amended
from time to time in Gliatech's sole discretion (hereinafter
"Products"), subject to the following terms and conditions.
2. PURCHASES AND SALES:
(a) Distributor agrees that it will purchase from Gliatech and sell
the minimum amount of Products throughout the Territory as set forth
on Appendix I.B., as the same may be amended based on the mutual
agreement of the parties to the terms and conditions of a yearly
marketing plan (the "Plan"), which Plan will be established from year
to year pursuant to Section 2(c) below.
(b) In order to maintain the rights granted by Gliatech under this
Agreement, pursuant to its appointment hereunder, Distributor agrees
to purchase and take delivery of the aggregate quantities of the
Products as set forth in the applicable Plan for the current year.
Each such Plan shall be substantially in the form of Appendix II, as
such may be amended from time to time in Gliatech's sole discretion.
(c) The parties agree that such Plan shall be renegotiated on an
annual basis and that the parties shall mutually agree as to the terms
and conditions of such yearly Plan on or before November 1st of each
year.
(d) Distributor agrees to devote its utmost time and effort to
distribute, market, sell, promote and maintain substantial sales of
the Products throughout the Territory and will cooperate with Gliatech
in all reasonable marketing plans which are mutually agreed to by the
parties hereto.
(e) Distributor shall maintain documentation indicating the quantity
and lot numbers of all Products sold to each customer such that, in
the event that it might be required, it would be possible to contact
all purchasers of individual lots of Products sold.
X-6
<PAGE> 2
3. ORDERS AND PRICES:
(a) Unless otherwise notified, all orders for the Products shall be in
writing and subject to approval and written, facsimile or telex
acceptance by Gliatech. Gliatech shall use its reasonable commercial
efforts to promptly fill (by full or partial shipment) Distributor's
orders which are accepted by Gliatech.
(b) Gliatech shall sell the Products to Distributor at its
current prices as set forth on Appendix I.B. attached hereto,
as the same may be amended from time to time in Gliatech's
sole discretion. All orders for the Products shall be made
and sold to Distributor on a C.I.F. customs cleared,
Distributor's warehouse basis.
(c) Distributor and Gliatech agree to work together to prepare,
present and file whatever documentation is required to obtain optimal
reimbursement by relevant third-party government and private payers
for the use of the Products within the Territory. All out-of-pocket
direct expenses incurred by a party in connection with such activities
shall be paid by such party.
4. PAYMENT:
(a) Payment for all orders shall be made in U.S. dollars by
wire transfer to a bank account to be designated by Gliatech.
(b) Terms for payments will be net 30 days from the invoice date,
unless Gliatech at any time determines that Distributor's credit is
unsatisfactory, in which case payment will be required c.o.d. No
credit for returns and allowances shall be allowed to Distributor
against outstanding invoices or otherwise without the prior written
approval of Gliatech.
(c) If for any reason payment of any invoices due to Gliatech should
not be made or are delayed beyond their due dates, then Distributor
shall be required to pay interest on the amount of any such invoices
at an annual rate equal to one percent (1%) above the prime rate in
effect at the time as charged by the National City Bank, Cleveland,
Ohio, USA from the due date of payment until the date (inclusive) on
which actual payment is received or collected by Gliatech.
5. DELIVERY: Delivery of the Products shall occur when the
Products are placed in the custody and control of Distributor at
Distributor's warehouse.
6. TRADEMARKS:
(a) All Products promoted, marketed, distributed and sold by
Distributor under this Agreement shall bear such patent, copyright and
trademark notices consistent with the letter and spirit of the
authorized patent, copyright and trademark
X-7
<PAGE> 3
notices as Gliatech shall require or specify to affix on the Products,
as the same may be amended from time to time at the sole discretion of
Gliatech. Gliatech makes no representation or warranty, express or
implied, that the Products will not infringe the property rights of
third parties in the Territory. In the event of such an infringement,
Distributor shall have no recourse against Gliatech for, and
Distributor hereby forever and irrevocably releases Gliatech from any
losses, liabilities, damages, costs or expenses incurred by
Distributor at any time due to the use by Distributor of any patents,
copyrights, trademarks, logos, tradenames, service marks or other
property rights of Gliatech or its affiliates, arising in connection
with the promotion, marketing and sales of the Products.
(b) Any use by Distributor of any trademarks, patent and copyright
notices, service marks, trade names, designs, logos, labels, labeling,
packaging and the like of Gliatech used on or in connection with the
Products (hereinafter collectively referred to as "Intellectual
Property") in connection with the promotion, marketing, distribution
or sale of the Products shall inure to the exclusive benefit of and
shall be in the manner provided by Gliatech, and in strict conformity
with the laws and governmental rules and regulations within the
Territory respecting their use.
(c) Distributor shall not, without the prior written consent of
Gliatech, use any intellectual property during the term of this
Agreement that is confusingly similar to any Intellectual Property of
Gliatech, use any other intellectual property in respect of the
Products, or use Intellectual Property except as expressly provided
hereunder.
7. AUTHORITY AND RESPONSIBILITY OF DISTRIBUTOR: Distributor undertakes to carry
out this Agreement as an independent contractor using its own employees which in
no sense are to be deemed employees or agents of Gliatech and Gliatech shall not
be accountable to Distributor or its employees in any way except in accordance
with the written agreement of Gliatech. All relationships entered into by
Distributor shall be for its exclusive account and risk and it shall not have
any power to bind Gliatech.
8. TERRITORIAL RESTRICTION: Distributor covenants with Gliatech that, without
the prior written consent of Gliatech, Distributor shall not (i) seek customers
for the Products outside the Territory, (ii) distribute to, or appoint a
subdistributor for, the distribution or sales of the Products inside or outside
the Territory or itself establish any branch, warehouse or distribution presence
of the Products outside the Territory, or (iii) export the Products outside
Western Europe (including the European Economic area and the customs territory
of the European Community) to any country where Gliatech or any of its
affiliates is marketing or distributing the Products or has granted marketing or
distributing rights to a third party; PROVIDED, HOWEVER, that it being expressly
X-8
<PAGE> 4
understood and agreed by the parties that the export prohibition contained
herein shall not apply to exports to any country in which the European Community
has an association or other agreement providing for free trade for the Products.
9. COMPETITION: Distributor shall not manufacture, sell, distribute, represent
or deal in or with, whether directly or indirectly, any products similar to or
competitive with the Products in the Territory without first obtaining written
consent from Gliatech therefor. Distributor further agrees that it shall not
obtain the Products for resale from any party other than Gliatech or its
designee(s).
10. REPRESENTATION AND ADVERTISING:
(a) All detailing, advertising, sales promotion and professional
service activities for the Products within the Territory undertaken by
Distributor shall be consistent with the advertising and promotional
materials for the Products approved by Gliatech as the labeling for
the Products, as the same may be amended from time to time at
Gliatech's sole discretion. Distributor shall be solely responsible
for ensuring that all detailing, advertising, sales promotion and
professional service activities for the Products within the Territory
conform in all respects with the laws, rules, regulations, customs and
procedures (collectively, the "Regulations") of the Territory and
Distributor shall include on labels and packaging such information
necessary for compliance with such Regulations, provided that
Distributor obtains the prior approval of Gliatech.
(b) All detailing, advertising, sales promotion and professional
services activities for the Products within the Territory shall be
undertaken by Distributor at its own expense. Copies of any
promotional, detailing, advertising or other materials relating to
Gliatech or the Products which Gliatech may in its discretion provide
to Distributor shall be provided at reasonable charge to Distributor.
(c) Any promotional, detailing, advertising or other materials
relating to Gliatech or the Products which are prepared by Distributor
shall be submitted for Gliatech's review and approval prior to use by
Distributor.
11. ALTERATIONS: Distributor shall not sell or offer for sale any
Products which may be expired, damaged, spoiled or altered from the
condition or appearance in which they were delivered to
Distributor.
12. AUTHORIZATIONS:
(a) Gliatech shall obtain and maintain at its expense all government
approvals, health or product registrations, licenses, visas or other
permits howsoever called (hereinafter referred to as "Authorizations")
required to import, export,
X-9
<PAGE> 5
sell, distribute, promote and handle the Products in the Territory
and/or to fulfill all its obligations under this Agreement. If any
Authorizations should be required by law to be held in Distributor's
name, Distributor agrees that such Authorizations shall be held by
Distributor, for the benefit of and in trust for Gliatech.
(b) Upon termination of this Agreement for any reason, Distributor
shall cooperate fully with Gliatech and take all steps to transfer and
assign, immediately and without any charge, any Authorizations which
may be held in its name to Gliatech or its designee(s) to the extent
permitted by law.
(c) Distributor's Quality System and the Essential Requirements as set
forth on Appendix III, as have been reviewed by, are acceptable to,
Gliatech. Distributor shall permit regular audits of such Quality
System and the Essential Requirements. Distributor warrants that any
corrective actions related to Gliatech's Products that are identified
in the audits will be performed in a timely manner.
13. CONFIDENTIALITY: If Gliatech should provide, disclose or deliver any
technical, marketing or other information to Distributor pertaining in any way
to the Products or Gliatech's business, Distributor shall keep such information
secret and confidential at all times and shall not use such information except
pursuant to this Agreement. Further, Distributor shall not disclose or deliver
such information to any person or party, except to Distributor's responsible
supervisory personnel who are required to have such information for purposes of
this Agreement and government agencies or officials, if necessary, for obtaining
the Authorizations.
14. REPORTS:
(a) Distributor shall provide Gliatech with immediate notice of any
and all adverse reactions (incidents or near incidents) and complaints
associated with the use of the Products that are reported by users to
its agents, representatives or employees. Adverse events shall be
reported using an adverse event reporting form, mutually agreeable to
the parties, as the same may be amended from time to time. Moreover,
Distributor shall provide Gliatech with immediate notice if it is
contacted by a Competent Authority or Notified Body regarding such
adverse reactions (incidents or near incidents). Distributor shall
promptly provide copies of all correspondence of regulatory action
involving Gliatech's products to Gliatech.
(b) Distributor shall furnish Gliatech on a monthly basis with such
reports, in substantially the form of Appendix II attached hereto, as
the same may be amended from time to time in Gliatech's sole
discretion, as Gliatech may reasonably request regarding sales effort,
sales, inventories of the Products on hand and other matters relevant
to this Agreement.
X-10
<PAGE> 6
15. TERM:
(a) This Agreement shall be effective upon signature by both parties
hereto. Unless otherwise sooner terminated under the provisions of
this Agreement, this Agreement shall be for a term of five (5) years.
Thereafter, this Agreement shall continue for two additional terms of
two (2) years. In the event that this Agreement continues for two
additional terms, any subsequent extension shall be for a term of one
(1) year and shall be subject to the mutual agreement of the parties.
This Agreement shall automatically continue for the next applicable
term unless either party sends a written termination notice to the
other party not less than six (6) months prior to the expiration of
the then existing term.
(b) Distributor and Gliatech hereby acknowledge and agree that any
such continuations or extensions of this Agreement between the
parties, regardless of any modification or renegotiation of the
Agreement, shall not deem this Agreement to be one of "indefinite
duration," regardless of any contrary interpretation by otherwise
applicable law.
(c) Notwithstanding any other provisions hereof, this Agreement may be
terminated by Gliatech upon the occurrence of any one of the following
events, any one of which shall constitute just cause for termination:
(i) Upon thirty (30) days written notice to Distributor, upon
cessation of production by Gliatech of the Products for any
reason whatsoever;
(ii) Upon thirty (30) days written notice to Distributor upon
institution of proceedings in receivership, bankruptcy or
insolvency by or against Distributor, or an assignment for the
benefit of creditors or dissolution or liquidation of
Distributor's business whether voluntarily or by a third
party;
(iii) Upon notice in writing to Distributor, upon the
closing of Distributor's offices in the Territory for any
reason whatsoever;
(iv) Upon notice in writing to Distributor, upon loss by
either Gliatech or Distributor of any license, permit or
authorization from any governmental agency within the
Territory necessary for the performance of the obligations
hereunder;
(v) Upon the failure of Distributor to sell the minimum
quantity of Products set forth on Appendix I.B., as such is
amended from year to year as provided herein;
(vi) Upon failure by the parties to mutually agree by
November 30th of each year to the terms and conditions of
the Plan;
X-11
<PAGE> 7
(vii) Upon notice in writing to Distributor, upon breach of
this Agreement by Distributor, which breach has not been cured
within thirty (30) days of receipt of notice from Gliatech of
such breach;
(viii) Upon a material change in the existing ownership
or control of Distributor's equity, business or assets;
or
(ix) Upon any major deviation by Distributor from the Quality
System and the Essential Requirements as set forth on Appendix
III or upon the failure of Distributor to timely correct such
deviation after receipt from Gliatech of notice of such
deviation.
(d) Notwithstanding any other provision hereof, this Agreement may be
terminated by Distributor upon the occurrence of any one of the
following events, any one of which shall constitute just cause for
termination;
(i) Upon thirty (30) days written notice to Gliatech, upon
institution of proceedings in receivership, bankruptcy or
insolvency by or against Gliatech, or an assignment for the
benefit of creditors or dissolution or liquidation of
Gliatech's business whether voluntarily or by a third party;
or
(ii) Upon notice in writing to Gliatech, upon breach of this
Agreement by Gliatech, which breach has not been cured within
thirty (30) days of receipt of notice from Distributor of such
breach.
(e) Upon termination of this Agreement for any reason, Distributor and
Gliatech hereby expressly acknowledge to and agree that the notice
periods preceding any such termination set forth herein are adequate
and sufficient under all the circumstances, and that no indemnity of
any nature whatsoever shall be owing or payable by Gliatech to
Distributor, including, but not limited to, indemnity for loss of
profit, goodwill, creation of clientele for the Products,
demonstration costs and termination costs or the performance of any
other activities in connection with the promotion and sale of the
Products except as may be due and owing according to the express
provisions of this Agreement.
16. RIGHTS UPON TERMINATION:
(a) Notwithstanding the termination of the Agreement for any reason
whatsoever, Distributor and Gliatech shall remain responsible to each
other for the performance of any and all obligations, including, but
not limited to, the discharge of all debts, incurred prior to, and
which obligations shall survive, the effective date of termination.
X-12
<PAGE> 8
(b) Within ten (10) days of the effective date of termination of this
Agreement, Distributor shall deliver to Gliatech, in accordance with
its written instructions, any and all marketing communications
materials then on hand relating to the Products, any materials
relating to pending applications for any intellectual property rights
with respect to the Products and any appropriate repayment for
marketing communications materials shall be made by Gliatech within
thirty (30) days following delivery subject to the rights of set-off
by Gliatech, as set forth in Section 17 herein below.
(c) Distributor agrees that, upon any such termination, Distributor
shall have no right to pass through Distributor's costs of terminating
its own employees, and that any such right is hereby expressly
disclaimed by Gliatech and expressly waived by Distributor.
Distributor agrees to indemnify, defend and hold Gliatech free and
harmless against all claims, actions, suits, losses, damages, expenses
and other liabilities of every kind and nature asserted or sustained
by employees, officers, directors, agents, joint venturers,
representatives of Distributor or the third parties by reason of any
termination of this Agreement.
(d) After notice of termination has been given as herein provided (and
following the expiration of the notice period) or upon termination of
this Agreement if effected without advance notice, the right of
Distributor to place orders for the Products shall cease and Gliatech
will have the right to appoint, accept orders from and deliver the
Products to a new Distributor for the Territory who may begin
deliveries to customers in the Territory immediately after the
effective date of termination.
17. REPURCHASE OPTION:
(a) Within thirty (30) days after a notice of termination is given or
after the effective date of termination (if effected without advance
notice), Distributor shall furnish Gliatech with a statement certified
by management showing in detail the current inventory of Products.
(b) Within fifteen (15) days following receipt of Distributor's
certified statement of inventory or, if such statement is not
provided, within forty-five (45) days after termination, Gliatech may,
in its sole discretion, elect, in whole or in part, to repurchase the
inventory of Products at prices equal to their original cost to
Distributor, less any commissions, discounts, allowances or returns
and other deductions by way of set-off for all unpaid amounts then
owed by Distributor to Gliatech, by notifying Distributor in writing.
Distributor shall allow Gliatech's representatives free access to view
and inspect such inventory during all normal business hours. Delivery
of the Products specified in the notice by which Gliatech exercises
its option shall be made by Distributor in accordance with Gliatech's
notice.
X-13
<PAGE> 9
Payment shall be made within thirty (30) days of delivery of such
inventory to Gliatech.
18. WARRANTY AND REPRESENTATIONS:
(a) Gliatech hereby expressly warrants and represents to Distributor
that all Products purchased by Distributor pursuant to this Agreement
have been approved for sale and use in the Territory and shall be free
from defects in materials and workmanship. Gliatech agrees to
indemnify, defend and hold Distributor harmless against all claims,
actions, suits, losses, damages and expenses in respect of claims made
by third parties alleging personal injury or death resulting from use
of the Product; PROVIDED, HOWEVER, that Gliatech shall not be liable
to Distributor for any claim by Distributor for loss of profits, or
for special, incidental or consequential damages owing to any defect
in the Products, whether caused by Gliatech's negligence or otherwise.
Notwithstanding anything to the contrary herein, Gliatech shall not
indemnify or defend Distributor or hold Distributor harmless against
any claim, action, suit, loss, damages or expenses in respect of
claims arising out of any wrongful act, by Distributor, including any
breach of this Agreement.
(b) As between Gliatech and Distributor, the liability of Gliatech to
Distributor, otherwise than in respect of third party claims, shall be
limited at Gliatech's option to replace those Products which are shown
to be defective either in materials or workmanship or to issue a
credit note for the full invoice value of such defective Products.
(c) Any claim or defect in materials or workmanship shall be allowed
only when submitted to Gliatech in writing within seven (7) days after
discovery of the defect, and in no event later than thirty (30) days
after the delivery of the Products to Distributor, together with the
alleged defective Products if requested by Gliatech. No claim shall be
allowed in respect of any Products which have been altered, neglected,
damaged, handled or stored in any manner which adversely affects them.
(d) Except for the warranties and representations stated above,
Gliatech makes no warranties or representations of any kind
whatsoever, express or implied, and all other warranties and
representations of whatever kind, including warranties of
merchantability and fitness for a particular purpose, are hereby
disclaimed by Gliatech and waived by Distributor. The preceding
subclauses (a) through (c) of this Article 19 set forth exclusively
all of Gliatech's liability in contract, tort or otherwise in the
event of defective Products and/or for breach of any warranties or
representations.
(e) Distributor agrees to indemnify, defend and hold Gliatech free and
harmless against all claims, actions, suits, losses, damages, expenses
and other liabilities of every kind and
X-14
<PAGE> 10
nature asserted or sustained by third parties by reason of any act of
neglect or breach committed by Distributor or any of its employees,
agents or representatives.
(f) Gliatech represents that so long as Distributor uses reasonable
commercial efforts to control its inventories and rotates its stock of
Products, Gliatech shall use its reasonable commercial efforts to
promptly replace any expired Products which it accepts for return.
Returned Products will be accepted by Gliatech if: (1) the Products
are received by Gliatech's Director of Manufacturing in Cleveland,
Ohio, USA, after the date of expiration marked on the package, (2) the
Products are in saleable condition and the original packaging is
inspected by Gliatech and found to be intact and (3) an acceptance
notice has been issued by Gliatech. Accepted returns will be replaced
by Gliatech free of any purchase, shipping or duties to Distributor.
19. MISCELLANEOUS:
(a) NOTICES: Any notices, approvals, reports, statements or other
communications given under this Agreement ("notices") shall be sent in
English and in writing and delivered either personally or by
registered mail (return receipt requested), to a party at the
addresses first stated herein or such other address designated by the
party hereafter for such purpose. Any period of time provided or
measured by such notice shall commence on and include the date of
mailing or of personal delivery, as the case may be, and shall be
calculated on the basis of calendar days.
(b) INTERPRETATION AND ENFORCEMENT OF AGREEMENT: All matters,
questions or disputes relating to the interpretation, form, validity,
performance and the parties' rights and obligations under this
Agreement shall be governed by and decided in accordance with the laws
of the Territory. Any disputes or questions which the parties cannot
resolve after negotiations shall be settled by arbitration instituted
at the option of either party. The arbitration will be conducted under
the regulations of American Arbitration Association. Each party hereby
accepts and submits itself unconditionally to the exclusive
jurisdiction of the arbitrator.
(c) PRIOR AGREEMENTS: This Agreement and the Appendices attached
hereto and made a part hereof, constitute the entire Agreement between
the parties with respect to the within subject matter, and to that
extent, terminate and supersede all previous agreements,
understandings, letters or other instruments whatsoever, if any,
whether written or oral, relating to the same subject matter.
(d) FORCE MAJEURE: Neither party shall be liable for delay
or failure to perform hereunder due to any contingency beyond
its control, including, but not limited to, acts of God,
fires, floods, wars, civil wars, sabotage, strikes,
X-15
<PAGE> 11
governmental laws, ordinances, rules or regulations or failure of
third party delivery. The party invoking any event constituting Force
Majeure shall be excused from its inability to perform its obligations
hereunder only to the extent and for the duration of the event of
Force Majeure so invoked and shall be bound to resume such performance
immediately after the cessation of such event.
(e) SEVERABILITY: Any provisions of this Agreement which may be held
to be illegal, invalid or unenforceable in any jurisdiction shall be
ineffective in such jurisdiction to the extent of such illegality,
invalidity or unenforceability, without affecting, impairing or
invalidating the remaining provisions of this Agreement in any
jurisdiction, which remaining provisions shall remain in full force
and effect.
(f) ASSIGNMENT AND AMENDMENT: This Agreement and all rights and
obligations provided herein shall not be assigned, transferred or
delegated by Distributor without Gliatech's prior written consent. No
amendment, alteration or other modification of this Agreement shall be
valid and binding upon the parties unless made in writing,
specifically referring to this Agreement and duly executed by the
parties hereto.
(g) COUNTERPARTS: This Agreement may be executed in two or more
counterparts, each of which may be deemed an original but all of which
shall constitute the same Agreement.
(h) SURVIVAL: The covenants, agreements and undertakings set forth
herein Sections 6(c), 12(b), 13 and 17 shall survive beyond the
termination of this Agreement for any reason whatsoever.
(i) WAIVER: The failure or delay of a party to protest or enforce its
rights and remedies with respect to any breach or failure relating to
performance of this Agreement shall not prejudice or be deemed to
constitute a waiver or surrender of such party's rights and remedies,
whether under this Agreement or at law, in equity or otherwise.
X-16
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the day and year
first above written.
ATTEST: Gliatech Inc.
By:
Name:
Title:
ATTEST: ---------------------------
By:
Name:
Title:
X-17
<PAGE> 1
EXHIBIT 10.20
GLIATECH
23420 Commerce Park Road
Cleveland, Ohio 44122
(216) 831-3200
Fax: (216) 831-4220
April 19, 1993
The Walt Disney World Swan Hotel
Guest - Dr. Michael A. Zupon
1200 Epcot Resort Blvd.
Lake Buena Vista, FL 32830
Dear Mike,
I am very pleased to offer you the position of Vice President, Product
Development and Operations of Gliatech. In this position you will report
directly to me. Your training and experience in various aspects of product
development and operations are pertinent to the needs and interests of Gliatech
and we believe you have the potential to make important contributions to our
progress. The terms of this offer are as follows:
1. COMPENSATION. Your starting base salary will be $115,000.00 per annum,
------------- payable at the monthly rate of $9,583.33. You will be
eligible for annual merit increases.
2. BONUS. You will be eligible annually for a merit bonus, based on
------ performance, of up to 30% of your base salary.
3. EQUITY. Upon joining the company, you will be granted incentive
------- stock options to purchase 90,000 shares of common stock.
The option will vest in equal amounts over a four-year
period commencing with the first anniversary of your
employment, and will be exercisable at the fair market
value of the common stock on the earlier of the date of
grant or the date on which your employment with the
company commences. You will be eligible for additional
grants of stock options at such periods as the Board of
Directors deems appropriate. Should you leave Gliatech
prior to full vesting, the unvested portion of your
options will be canceled. The Company may elect to
repurchase the stock you have purchased upon the exercise
of vested options in the event of such early termination.
X-18
<PAGE> 2
Page 19 (Con't.)
Michael A. Zupon
April 19, 1993
4. OTHER BENEFITS. You will be eligible for medical, dental,
-------------- life and disability insurance and other benefits
established by the company for its employees, including a
401(k) plan. You will be eligible for three weeks paid
vacation. In addition to vacation, there will be 12 paid
company holidays (10 days fixed, one company optional and
one personal options) per year.
5. RELOCATION. You will be reimbursed for customary and reasonable costs
---------- incurred in moving to Cleveland. This will include
packing, insuring, moving and unpacking your household
goods and the expenses associated with up to (2) two
house-hunting trips. In addition you will be entitled to
an allowance for temporary housing of $800.00 per month
for a period of one year.
6. This offer is contingent upon your successfully passing a physical
examination.
Mike, we are delighted by your decision to join Gliatech and I look forward to
your acceptance of this offer of employment and to the start of your employment
with Gliatech on or about June 10, 1993. Please call me if you have any
questions or need clarification concerning the terms of this offer.
Kindly indicate your acceptance of these terms by signing these letters and
returning a signed copy to me by April 30, 1993.
Sincerely,
/s/Thomas O. Oesterling
Thomas O. Oesterling, Ph.D.
President & CEO
X-19
<PAGE> 3
Page 20 (Con't.)
Michael A. Zupon
April 19, 1993
I have read and accept the terms of employment as set forth above.
/s/Michael A. Zupon 4/27/93
- -------------------------- -------
Michael A. Zupon, Ph.D. Date
7. Severance: Twelve (12) months of salary for dismissal without cause.
/S/TOO 8/5/96 /S/MAZ 8/5/96
------ ------ ------ ------
TOO Date MAZ Date
X-20
<PAGE> 1
EXHIBIT 10.21
GLIATECH
23420 Commerce Park Road
Cleveland, Ohio 44122
(216) 831-3200
Fax: (216) 831-4220
June 27,1996
Jon D. Schoeler
717 Orchard Road
Kinnelon, NJ 07405
Dear Jon,
I am very pleased to offer you the position of Vice President, Sales and
Marketing, of Gliatech Inc. In this position you will report directly to me.
Your training and experience in various aspects of sales and marketing, both
domestic and international, are pertinent to the needs and interests of Gliatech
and we believe you have the potential to make an important contribution to our
business success. The terms of this offer are as follows:
1. COMPENSATION. Your starting base salary will be $140,000.00 per annum,
------------- payable at the monthly rate of $11,666.67. You will be
eligible for annual merit increases.
2. BONUS. You will be eligible annually for a merit bonus, based on
----- achievement of personal and company objectives, of up to
30% of your base salary; plus a sales bonus, based on
achievement of product revenue targets, of up to 10% of
your base salary.
3. EQUITY. Upon joining the company, you will be granted incentive
------ stock options to purchase 50,000 shares of common stock.
The option will vest in equal amounts over a four-year
period commencing with the first anniversary of the date
of grant and will be exercisable at the fair market
value, as traded on the NASDAQ National Market Exchange,
of the common stock on the date on which your employment
with the company commences. This option is subject to all
terms and conditions of the company's Employee Stock
Option Plan and to the approval of the Compensation
Committee of the Board of Directors.
X-21
<PAGE> 2
Page 22 (Con't.)
Jon D. Schoeler
June 27, 1996
4. OTHER BENEFITS. You will be eligible for medical, dental,
--------------- life and disability insurance and other benefits
established by the company for its employees, including
participation in a 401(k) plan. You will be eligible for
three weeks paid vacation. In addition to vacation, there
will be 12 paid company holidays (10 days fixed, one
company optional and one personal option) per year.
5. RELOCATION. You will be reimbursed for customary and reasonable costs
---------- incurred in moving to Cleveland. This will include
packing, insuring, moving and unpacking your household
goods, the expenses associated with a house-hunting and
related relocation travel expenses and reimbursement of
realtor and closing costs for sale of your home. We will
provide you with up to twelve months of temporary housing
while you search for a new home.
6. SEVERANCE. Twelve (12) months of salary for dismissal without cause.
---------
7. This offer is contingent upon your successfully passing a physical
examination.
Jon, we are delighted by your decision to join Gliatech and I look forward to
your acceptance of this offer of employment and to the start of your employment
with Gliatech on or before July 15, 1996. Please call me if you have any
questions or need clarification concerning the terms of this offer.
Kindly indicate your acceptance of these terms by signing these letters and
returning a signed copy to me by July 8, 1996.
Sincerely,
/s/Thomas O. Oesterling
- ----------------------------
Thomas O. Oesterling, Ph.D.
President & CEO
I have read and accept the terms of employment as set forth above.
X-22
<PAGE> 3
Page 23 (Con't.)
Jon D. Schoeler
June 27, 1996
/s/ Jon D. Schoeler June 29, 1996
- ----------------------- -------------
Jon D. Schoeler Date
X-23
<PAGE> 1
EXHIBIT 11.1
<TABLE>
Statement Regarding Computation of Per-Share Net Loss
<CAPTION>
Twelve Months Ended December 31,
1995 1996
-------------------------------
(Pro forma)
<S> <C> <C>
Average shares outstanding 4,982,913 (a) 7,313,230
Net effect of anti-dilutive stock and stock
options and warrants (B) 514,438 0
-------------------------------
Total 5,497,351 7,313,230
===============================
Net Loss ($4,985,861) ($5,699,555)
===============================
Per-share amount ($0.91) ($0.78)
===============================
<FN>
(A) Assumes conversion of Preferred Stock into shares of Common Stock as if
they had been converted on the original date of issuance, except for
Preferred Stock issued within the twelve-month period preceding the
filing of the Company's initial public offering, which is treated as
outstanding for all periods prior to June 30, 1995, the latest period
presented in the initial public offering. See (b).
(B) Stock and stock options and warrants issued or granted within a
twelve-month period preceding the filing of the Company's initial public
offering are treated as outstanding for all periods prior to
June 30, 1995. Subsequent to June 30, stock options and warrants are
excluded as their effect is anti-dilutive.
</TABLE>
<PAGE> 1
Exhibit 13.1
Gliatech Inc. and Subsidiaries (A Development Stage Enterprise)
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31, INCEPTION TO
------------------------------------------------------- DECEMBER 31,
(in thousands, except share and per share data) 1992 1993 1994 1995 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Research contracts and licensing fees $ 0 $ 0 $ 918 $ 2,217 $ 2,855 $ 5,989
Product sales 0 0 86 182 901 1,170
Government grants 186 302 141 255 122 1,090
------- ------- ------- ------- -------- --------
Total revenues 186 302 1,145 2,654 3,878 8,249
OPERATING COSTS AND EXPENSES
Research and development 2,618 4,441 4,600 5,107 6,120 27,046
Selling, general and administrative 1,693 1,674 2,365 2,599 4,070 14,179
Depreciation and amortization 279 312 272 171 166 1,445
Cost of product sales 58 123 342 522
------- ------- ------- ------- -------- --------
Total operating costs and expenses 4,590 6,427 7,295 8,000 10,698 43,192
------- ------- ------- ------- -------- --------
Loss from operations (4,404) (6,125) (6,150) (5,346) (6,820) (34,943)
Interest income, net 324 211 97 360 1,120 2,428
------- ------- ------- ------- -------- --------
NET LOSS $(4,080) $(5,914) $(6,053) $(4,986) $ (5,700) $(32,515)
======= ======= ======= ======= ======== ========
Net loss per common share
(pro forma for 1994 and 1995) $ (1.30) $ (0.91) $ (0.78)
========= ========= =========
Shares used for purposes of computing
net loss per common share 4,651,616 5,497,351 7,313,230
========= ========= =========
<CAPTION>
December 31,
--------------------------------------------------------------
(in thousands) 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents and
short-term investments $ 9,520 $ 4,321 $ 4,671 $ 23,023 $ 17,996
Working capital $ 4,698 $ 2,860 $ 1,511 $ 21,762 $ 15,821
Total assets $ 11,059 $ 6,148 $ 6,716 $ 25,346 $ 20,804
Deficit accumulated during the
development stage $(10,802) $(16,716) $(22,768) $(27,754) $(33,454)
Total stockholders' equity $ 9,758 $ 4,177 $ 3,122 $ 23,182 $ 17,627
</TABLE>
See notes to consolidated financial statements.
9
<PAGE> 2
Gliatech Inc. and Subsidiaries (A Development Stage Enterprise)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Since commencing operations in 1988, the Company has been a development stage
company. The Company is developing and commercializing the ADCON(R) family of
products to inhibit excessive scarring and adhesions after surgery. Based on
European pivotal clinical studies and other compliance efforts and submission of
data, the Company obtained regulatory clearance to affix CE Marking on
ADCON(R)-L and ADCON(R)-T/N, thereby allowing ADCON(R)-L and ADCON(R)-T/N to be
marketed in the 15 European Union countries for lumbar disc surgery and tendon
and peripheral nerve surgeries, respectively. The Company has entered into
distribution agreements with independent distributors for ADCON(R)-L and
ADCON(R)-T/N in Australia, Austria, Belgium, Germany, Italy, The Netherlands,
New Zealand, Scandinavia, Spain, Switzerland and the United Kingdom. In
addition, the Company is pursuing the development of drug candidates for the
treatment of certain nervous system disorders, including Alzheimer's Disease.
Since inception, the Company's revenues have been derived primarily from
contract research payments from a research contract with Janssen Pharmaceutica,
N.V. of Belgium ("Janssen"), a wholly-owned subsidiary of Johnson & Johnson, to
collaborate on the discovery and development of compounds to slow the
progression of Alzheimer's Disease (the "Janssen Agreement"). The Company has
also received revenues from various government grants which have been awarded to
the Company.
RESULTS OF OPERATIONS
Years ended December 31, 1996, 1995 and 1994
REVENUES
Total revenues increased to $3,877,975 in 1996 from $2,653,606 in 1995 and
$1,144,934 in 1994. The Company had research revenues in 1996 of $2,854,860 from
its research contract with Janssen compared to research revenues of $2,216,668
and $917,691 in 1995 and 1994, respectively. The Janssen collaboration began in
October 1994 and, in 1994, research revenues included a $500,000 one-time
up-front licensing fee. The increase in 1995 research revenues is a result of
recognizing a full year of the Janssen research contract revenues in 1995. In
September 1995, the Company entered into an addendum to the Janssen Agreement in
order to expand the scope of the collaboration with Janssen on Alzheimer's
Disease to include research relating to inhibitors of complement activation.
This addendum to the Janssen Agreement added approximately $875,000 to research
contract revenues in 1996 and $290,000 to research contract revenues in 1995.
The Company's product sales increased to $900,932 in 1996 from $182,233 in
1995 and $86,340 in 1994. The increase in product sales in 1996 resulted from
sales of the Company's ADCON(R)-L and ADCON(R)-T/N products in certain European
countries, as well as Australia and New Zealand. The increase in product sales
in 1995 was due to initial inventory stocking orders for several new European
distributors after the Company obtained regulatory approval of ADCON(R)-L in
1995.
The Company's government-funded research grant revenues were $122,183 in
1996, $254,705 in 1995 and $140,903 in 1994. The levels of grant revenues were a
direct result of the number of government-funded research grants awarded the
Company in each year.
EXPENSES
Expenses for research and development increased to $6,119,533 in 1996 from
$5,107,154 in 1995 and $4,599,834 in 1994. The increases in 1996 and 1995 were
due primarily to increased staffing and clinical contract expenses due to of the
initiation of pivotal clinical trials in the U.S. for both ADCON(R)-L and
ADCON(R)-T/N beginning in the fourth quarter of 1995 and continuing throughout
1996. Additionally, the increase in 1996 is a result of additions in staffing
and purchases of laboratory supplies and services relating to increased research
activities beginning in the first quarter of 1996 with respect to Alzheimer's
Disease and Cognition Modulation programs and write-offs of costs associated
with patents which were abandoned due to changes in the technology pursuits of
the Company. Increased expenses associated with the Gliatech's Alzheimer's
Disease program are funded under the Company's agreement with Janssen.
Selling, general and administrative expenses were $4,070,173 in 1996,
$2,599,290 in 1995 and $2,365,395 in 1994. The increase for each of these
periods was primarily due to an increase in sales and marketing expenses as
Gliatech continued to expand its sales and marketing efforts for its ADCON(R)-L
and ADCON(R)-T/N products in the European Union and
10
<PAGE> 3
Australia and New Zealand. Additionally, Gliatech incurred increased general
and administrative expenses of $230,000 in 1996 associated with the filing of a
registration statement with the U.S. Securities and Exchange Commission (SEC)
for an offering of Common Stock which was subsequently withdrawn due to
unfavorable market conditions. The Company also incurred increased general and
administrative expenses in 1996 associated with its first full year of
reporting as a publicly traded company.
Depreciation and amortization expense was $166,411 in 1996, $170,395 in
1995 and $272,221 in 1994. This expense has decreased over the three-year period
as several Company assets have become fully depreciated.
Cost of products sold increased to $341,534 in 1996 from $122,589 in 1995
and $57,848 in 1994. These increases in cost of products sold were due primarily
to the increases in products sales for the corresponding three year period.
However, cost of products sold decreased as a percentage of product sales in
1996 to 38 percent from 67 percent in 1995 and in 1994. This decrease was
primarily due to improved absorption of manufacturing overhead costs as a result
of increased production volumes in 1996. In all three periods, cost of products
sold included costs associated with the start-up of manufacturing processes with
an outside contract manufacturer for ADCON(R)-L and ADCON(R)-T/N.
INTEREST INCOME
Net interest income increased to $1,120,121 in 1996 from $359,961 in 1995 and
$97,794 in 1994. The increases in 1996 and 1995 were due primarily to the
interest earned on the cash received in the October 1995 initial public offering
of Common Stock and the June 1995 private placement of equity securities.
INCOME TAXES
At December 31, 1996, the Company had net operating tax loss carryforwards of
approximately $14,819,000 for income tax purposes. In addition, at December 31,
1996, the Company had approximately $1,883,000 of research and development tax
credit carryforwards. Such losses and credit carryforwards may be carried
forward to reduce future tax liabilities and expire at various dates between
2003 and 2011. The Company has offset the tax benefit of the net operating loss
and tax credit carryforwards with a valuation allowance as realization of the
benefit is not assured. Pursuant to the Tax Reform Act of 1986, the utilization
of net operating loss and research and development tax credit carryforwards for
tax purposes may be subject to an annual limitation if a cumulative change in
ownership of more than 50% occurs over a three-year period. The future issuance
of securities by the Company and/or sales of securities by the Company's
principal stockholders could result in such a change of ownership.
LIQUIDITY AND CAPITAL RESOURCES
The Company received net proceeds, after expenses of the offering, of
approximately $19,647,000 from its initial public offering in which the Company
sold 2,300,000 shares of Common Stock at an initial public offering price of
$9.50 per share in October 1995. Prior to the public offering, the Company had
financed its operations primarily through the private placement of its equity
securities and to a lesser extent through federally sponsored research grants
and research contract and licensing fees. In June 1995, the Company received net
proceeds of approximately $4,653,000 through a private placement of equity
securities. Since its inception, the Company has received $49,293,835 in net
proceeds from equity financings. In addition, from its inception through
December 31, 1996, the Company has recognized revenue of $5,989,219 from its
research collaboration agreement with Janssen, $1,090,382 from several federally
sponsored research grants and $1,169,505 from product sales. Janssen is expected
to pay the Company approximately $2,800,000 during fiscal 1997. The Company also
has established a $1,500,000 unsecured line of credit with a bank. As of
December 31, 1996, the Company had no borrowings against the line of credit.
In order to preserve principal and maintain liquidity, the Company's funds
are invested in commercial paper and other short-term investments. As of
December 31, 1996 and December 31, 1995, the Company's cash and cash equivalents
and short-term investments totaled $17,995,769 and $23,023,301, respectively.
Also, during 1995, the Company received two $100,000 Phase I Small Business
Innovation Research (SBIR) grants from the National Institute of Neurological
Disorders and Stroke (NINDS) division of the National
11
<PAGE> 4
Institute of Health (NIH) to develop histamine H(3) receptor agents. In
early 1997, the Company was awarded a Phase II SBIR Program grant from the
NINDS for research evaluating histamine H(3) receptor antagonists to treat
Attention Deficit Hyperactive Disorders. The grant has a two-year term and will
provide as much as $750,000 in funding. If the Company is successful in other
Phase I research, additional Phase II awards could be sought for funding to aid
in further development of these agents; however, there is no assurance that
such additional funding will be obtained.
The Company anticipates that a substantial portion of the remaining
proceeds of its initial public offering will be used to fund clinical trials of
ADCON(R)-L and ADCON(R)-T/N in the U.S. and the marketing efforts for sales of
the ADCON(R) products. In addition, the Company anticipates that these proceeds
will be used to fund continued development of additional ADCON(R) products, for
the research and development of products relating to its Cognition Modulation
program and for working capital and general corporate purposes. The Company's
future liquidity and capital requirements will depend on many factors,
including, but not limited to, the commercial potential of its ADCON(R) family
of products, the timing of regulatory approvals, the timing and results of
preclinical testing and clinical studies, the progress of the Company's research
and development programs and the ability of the Company to establish and
maintain collaborative arrangements with others for the purpose of funding
certain research and development programs. The Company believes that its current
cash position and other financial resources will enable it to conduct its
current and planned operations through at least fiscal 1998.
The Company anticipates that it will augment its cash balance through
financing transactions, government grants and further corporate alliances. No
assurances can be given that adequate levels of additional funding can be
obtained on favorable terms, if at all.
The Company is a party to a license agreement and a related sponsored
research agreement with a university that provides for a royalty of up to 5% of
revenues from products covered by these agreements. In 1995, a dispute regarding
inventorship of the ADCON(R) products and the rights of the university to
receive royalties from sales of ADCON(R) products arose between Gliatech and the
university. The university has threatened litigation regarding this dispute.
There has been no resolution of this matter. The Company is not able to make any
estimate of costs that may arise as a result of any outcomes from this dispute
and there can be no assurance that the Company will not be required to pay any
costs or royalties or that any costs to the Company, or royalties that may
result, from this dispute will not have an adverse effect on the Company.
Statements regarding the Company's expectations as to demand for its
products, government regulations and certain other information presented in this
Annual Report constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the Company believes
that its expectations are based on reasonable assumptions within the bounds of
its business and operations, there can be no assurance that actual results will
not differ materially from its expectations. Factors which cause actual results
to differ from expectations include, but are not limited to, uncertainty of
future profitability, uncertainty of market acceptance, adequacy of third party
reimbursement, extent of government regulation, availability of product from
manufacturer, productivity of independent distributors selling ADCON(R) products
in Europe, Australia and New Zealand, continued cooperative efforts by Janssen
in its Alzheimer's Disease collaboration, and uncertainty regarding patents and
proprietary rights.
12
<PAGE> 5
Gliatech Inc. and Subsidiaries (A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors 13
Consolidated Balance Sheets at December 31, 1995 and 1996 14
Consolidated Statements of Operations for the years ended December 31, 1994,
1995 and 1996 and for the period from inception
of operations (August 31, 1988) through December 31, 1996 15
Consolidated Statements of Changes in Stockholders' Equity for the period
from inception of operations (August 31, 1988) through December 31, 1988 and
for the years ended December 31, 1989, 1990, 1991, 1992,
1993, 1994, 1995 and 1996 16
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and for the period from inception
of operations (August 31, 1988) through December 31, 1996 18
Notes to Consolidated Financial Statements 19
</TABLE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Gliatech Inc.
We have audited the accompanying consolidated balance sheets of Gliatech Inc.
and Subsidiaries (a development stage enterprise) as of December 31, 1995 and
1996, and the consolidated statements of operations, changes in stockholders
equity, and cash flows for each of the three years in the period ended December
31, 1996, and for the period from inception of operations (August 31, 1988)
through December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Gliatech Inc. and subsidiaries at December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, and for the period from
inception of operations (August 31, 1988) through December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
February 11, 1997
Cleveland, Ohio
13
<PAGE> 6
Gliatech Inc. and Subsidiaries (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,780,360 $ 9,120,547
Short-term investments 2,242,941 8,875,222
Accounts receivable 138,428 331,157
Government grants receivable 74,060 7,290
Inventories 417,659 387,118
Prepaid expenses and other 272,340 277,276
------------ ------------
Total current assets 23,925,788 18,998,610
Property and equipment, net 566,961 1,129,671
Other assets, net 853,187 675,959
------------ ------------
TOTAL ASSETS $ 25,345,936 $ 20,804,240
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:
Demand note from bank $ 400,000
Accounts payable and other accrued expenses 1,045,785 $ 1,369,583
Accrued compensation 252,053 204,328
Accrued clinical trial costs 186,558 796,861
Deferred research contract revenue 279,095 806,359
------------ ------------
Total current liabilities 2,163,491 3,177,131
Stockholders' equity:
Common Stock, $.01 par value:
Authorized shares--30,000,000 at December 31, 1995 and 1996
Issued and outstanding shares--7,297,865 at December 31, 1995
and 7,320,089 at December 31, 1996 72,978 73,201
Additional paid-in capital 50,886,788 51,007,673
Deferred compensation (23,111)
Deficit accumulated during the development stage (27,754,210) (33,453,765)
------------ ------------
Total stockholders' equity 23,182,445 17,627,109
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,345,936 $ 20,804,240
============ ============
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 7
Gliatech Inc. and Subsidiaries (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION OF
OPERATIONS
(AUGUST 31, 1988)
THROUGH
Year Ended December 31 DECEMBER 31,
1994 1995 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Research contracts and licensing fees $ 917,691 $ 2,216,668 $ 2,854,860 $ 5,989,219
Product sales 86,340 182,233 900,932 1,169,505
Government grants 140,903 254,705 122,183 1,090,382
----------- ----------- ----------- ------------
Total revenues 1,144,934 2,653,606 3,877,975 8,249,106
OPERATING COSTS AND EXPENSES
Research and development 4,599,834 5,107,154 6,119,533 27,046,072
Selling, general and administrative 2,365,395 2,599,290 4,070,173 14,179,095
Depreciation and amortization 272,221 170,395 166,411 1,444,789
Cost of products sold 57,848 122,589 341,534 521,971
----------- ----------- ----------- ------------
Total operating costs and expenses 7,295,298 7,999,428 10,697,651 43,191,927
--------- ----------- ----------- ------------
Loss from operations (6,150,364) (5,345,822) (6,819,676) (34,942,821)
Interest income, net 97,794 359,961 1,120,121 2,428,078
----------- ----------- ----------- ------------
NET LOSS $(6,052,570) $(4,985,861) $(5,699,555) $(32,514,743)
=========== =========== =========== ============
Net loss per common share (pro forma for
1994 and 1995) $ (1.30) $ (0.91) $ (0.78)
=========== =========== ===========
Shares used for purposes of computing net
loss per common share 4,651,616 5,497,351 7,313,230
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 8
Gliatech Inc. and Subsidiaries (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Preferred Convertible Class A
Stock Common Stock Common Stock
-------------------------- ----------------------------- ----------------------
Number of Number of Contra Number of
Shares Par Value Shares Par Value Account Shares Par Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1988 0 $ 0 0 $ 0 $ 0 0 $ 0
Issuance of Redeemable
Convertible Series A
Preferred Stock at $1.44 per
share 1,806,667 18,067
Stock award of Convertible
Class A Common Stock 450,000 4,500 (1,683)
Accretion of Redeemable
Convertible Series A
Preferred Stock
Amortization of contra account 140
Net loss--1988
----------- --------- -------- ------- ------- ------------ --------
Balance at December 31, 1988 1,806,667 18,067 450,000 4,500 (1,543)
Accretion of Redeemable
Convertible Series A
Preferred Stock
Amortization of contra account 561
Net loss--1989
----------- --------- -------- ------- ------- ------------ --------
Balance at December 31, 1989 1,806,667 18,067 450,000 4,500 (982)
Issuance of Redeemable
Convertible Series B
Preferred Stock at $2.16 per
share 1,467,593 14,676
Accretion of Redeemable
Convertible Series A
Preferred Stock
Amortization of contra account 561
Net loss--1990
----------- --------- -------- ------- ------- ------------ --------
Balance at December 31, 1990 3,274,260 32,743 450,000 4,500 (421)
Issuance of Convertible Series
B Preferred Stock at $2.16
per share, net of expense 615,741 6,157
Exercise of stock options 12,700 127
Amortization of contra account 421
Compensation related to grant
of stock options
Net loss--1991
----------- --------- -------- ------- ------- ------------ --------
Balance at December 31, 1991 3,890,001 38,900 450,000 4,500 0 12,700 127
Issuance of Convertible Series
C Preferred Stock at $1.50
per share, net of expense 8,245,784 82,459
Exercise of stock options 2,000 20
Issuance of stock bonus 18,000 180
Compensation related to grant
of stock options
Net loss--1992
----------- --------- -------- ------- ------- ------------ --------
Balance at December 31, 1992 12,135,785 121,359 450,000 4,500 32,700 327
Exercise of stock options 2,630 26
Issuance of stock bonus 18,200 182
Issuance of Common Stock 22,000 220
Compensation related to grant
of stock options
Net loss--1993
----------- --------- -------- ------- ------- ------------ --------
Balance at December 31, 1993 12,135,785 121,359 450,000 4,500 75,530 755
Exercise of stock options 135 1
Issuance of Convertible Series
D Preferred Stock and
warrants at
$1.50 per share, net of
expense 2,420,001 24,200
Issuance of stock bonus 6,598 66
Issuance of Common Stock 680 7
Issuance of Convertible Series
E Preferred Stock and
warrants at
$1.50 per share, net of expense 1,000,000 10,000
Compensation related to grant
of stock options
Net loss--1994
----------- --------- -------- ------- ------- ------------ --------
Balance at December 31, 1994 15,555,786 155,559 450,000 4,500 82,943 829
Exercise of stock options 13,850 139
Redemption of Common Stock (4,040) (40)
Issuance of Convertible Series
F Preferred Stock at $1.85
per share, net of expense 2,702,703 27,027
Issuance of stock bonus 12,092 120
Issuance of Common Stock 12,061 121
Issuance of Common Stock in
initial public offering, net
of expense 2,300,000 23,000
Conversion of Preferred Stock
and Class A Common Stock (18,258,489) (182,586) (450,000) (4,500) 4,718,015 47,180
Exercise of stock warrants 162,944 1,629
Compensation related to grant
of stock options
Net loss
----------- --------- -------- ------- ------- ------------ --------
BALANCE AT DECEMBER 31, 1995 0 0 0 0 0 7,297,865 72,978
EXERCISE OF STOCK OPTIONS 12,175 122
ISSUANCE OF STOCK BONUS 6,088 61
EXPENSES OF ISSUANCE OF COMMON
STOCK
EXERCISE OF STOCK WARRANTS 3,961 40
COMPENSATION RELATED TO GRANT
OF STOCK OPTIONS
NET LOSS
----------- --------- -------- ------- ------- ------------ --------
Balance at December 31, 1996 0 $ 0 0 $ 0 $ 0 $7,320,089 $73,201
=========== ========= ======== ======= ======= ============ ========
<CAPTION>
Deficit
Accumulated
Additional during the Total
Paid-in Deferred Development Stockholders'
Capital Compensation Stage Equity
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at August 31, 1988 $ 0 $ 0 $ 0 $ 0
Issuance of Redeemable
Convertible Series A
Preferred Stock at $1.44 per
share 2,583,535 2,601,602
Stock award of Convertible
Class A Common Stock 2,817
Accretion of Redeemable
Convertible Series A
Preferred Stock 111,200 (111,200) 0
Amortization of contra account 140
Net loss--1988 (294,123) (294,123)
------------- ----------- -------------- -------------
Balance at December 31, 1988 2,694,735 (405,323) 2,310,436
Accretion of Redeemable
Convertible Series A
Preferred Stock 448,422 (448,422) 0
Amortization of contra account 561
Net loss--1989 (802,926) (802,926)
------------- ----------- -------------- -------------
Balance at December 31, 1989 3,143,157 (1,656,671) 1,508,071
Issuance of Redeemable
Convertible Series B
Preferred Stock at $2.16 per
share 3,155,324 3,170,000
Accretion of Redeemable
Convertible Series A
Preferred Stock 379,400 (379,400) 0
Amortization of contra account 561
Net loss--1990 (1,855,903) (1,855,903)
------------- ----------- -------------- -------------
Balance at December 31, 1990 6,677,881 (3,891,974) 2,822,729
Issuance of Convertible Series
B Preferred Stock at $2.16
per share, net of expense 1,309,630 1,315,787
Exercise of stock options 4,318 4,445
Amortization of contra account 421
Compensation related to grant
of stock options 130,250 (81,250) 49,000
Net loss--1991 (2,829,868) (2,829,868)
------------- ----------- -------------- -------------
Balance at December 31, 1991 8,122,079 (81,250) (6,721,842) 1,362,514
Issuance of Convertible Series
C Preferred Stock at $1.50
per share, net of expense 12,237,689 12,320,148
Exercise of stock options 680 700
Issuance of stock bonus 67,320 67,500
Compensation related to grant
of stock options 116,740 (29,413) 87,327
Net loss--1992 (4,080,101) (4,080,101)
------------- ----------- -------------- -------------
Balance at December 31, 1992 20,544,508 $(110,663) (10,801,943) 9,758,088
Exercise of stock options 3,295 3,321
Issuance of stock bonus 136,318 136,500
Issuance of Common Stock 164,780 165,000
Compensation related to grant
of stock options (3,987) 31,961 27,974
Net loss--1993 (5,913,836) (5,913,836)
------------- ----------- -------------- -------------
Balance at December 31, 1993 20,844,914 (78,702) (16,715,779) 4,177,047
Exercise of stock options 289 290
Issuance of Convertible Series
D Preferred Stock and
warrants at
$1.50 per share, net of
expense 3,402,228 3,426,428
Issuance of stock bonus 49,434 49,500
Issuance of Common Stock 5,093 5,100
Issuance of Convertible Series
E Preferred Stock and
warrants at
$1.50 per share, net of expense 1,479,500 1,489,500
Compensation related to grant
of stock options (805) 27,699 26,894
Net loss--1994 (6,052,570) (6,052,570)
------------- ----------- -------------- -------------
Balance at December 31, 1994 25,780,653 (51,003) (22,768,349) 3,122,189
Exercise of stock options 34,499 34,638
Redemption of Common Stock (30,295) (30,335)
Issuance of Convertible Series
F Preferred Stock at $1.85
per share, net of expense 4,626,062 4,653,089
Issuance of stock bonus 90,567 90,687
Issuance of Common Stock 102,390 102,511
Issuance of Common Stock in
initial public offering, net
of expense 19,646,134 19,669,134
Conversion of Preferred Stock
and Class A Common Stock 139,906 0
Exercise of stock warrants 498,372 500,001
Compensation related to grant
of stock options (1,500) 27,892 26,392
Net loss (4,985,861) (4,985,861)
------------- ----------- -------------- -------------
Balance at December 31, 1995 50,886,788 (23,111) (27,754,210) 23,182,445
Exercise of stock options 91,191 91,313
Issuance of stock bonus 51,688 51,749
Expenses of issuance of common
stock (21,954) (21,954)
Exercise of stock warrants (40)
Compensation related to grant
of stock options 23,111 23,111
Net loss (5,699,555) (5,699,555)
------------- ----------- -------------- -------------
Balance at December 31, 1996 $51,007,673 $ 0 $(33,453,765) $17,627,109
============= =========== ============== =============
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 9
Gliatech Inc. and Subsidiaries (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION OF
OPERATIONS
(AUGUST 31, 1988)
THROUGH
Year Ended December 31 DECEMBER 31,
1994 1995 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(6,052,570) $ (4,985,861) $ (5,699,555) $(32,514,743)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 272,221 170,395 166,411 1,444,789
Patent cost write-off 154,185 27,000 277,889 459,074
Loss on disposal of equipment 102,000
Compensation from issuance of stock and
stock options 26,894 72,303 23,111 286,609
Changes in operating assets and liabilities:
Accounts receivable (86,340) (52,088) (192,729) (331,157)
Inventories (440,255) 22,596 30,541 (387,118)
Government grants receivable and other assets 269,394 (148,809) 61,834 (294,565)
Accounts payable and other accrued expenses (128,062) 152,491 327,822 1,362,912
Deferred contract research revenue 1,514,509 (1,235,414) 527,264 806,359
Other liabilities 309,355 (213,808) 610,303 1,403,796
------------ -------------- -------------- ---------------
Net cash used in operating activities (4,160,669) (6,191,195) (3,867,109) (27,662,044)
INVESTING ACTIVITIES
Sale (purchase) of available for sale securities, net 48,838 1,708,221 (6,632,281) (8,875,222)
Payment for patent rights and trademarks (262,943) (144,622) (114,629) (1,185,745)
Payment of organization costs (139,779)
Purchase of property and equipment (124,345) (151,609) (715,153) (1,981,000)
------------ -------------- -------------- ---------------
Net cash (used in) provided by investing activities (338,450) 1,411,990 (7,462,063) (12,181,746)
FINANCING ACTIVITIES
Proceeds from (payment of) demand note from bank 100,000 (400,000)
Principal payments on capital lease obligations (123,494) (43,228) (565,601)
Proceeds from sale and leaseback 75,131
Proceeds from issuance of Preferred Stock, net 4,915,928 4,653,089 28,976,554
Proceeds from issuance of Common Stock, net 5,100 19,669,134 (21,954) 19,817,280
Proceeds from exercise of stock options 290 60,903 91,313 160,972
Proceeds from exercise of warrants 500,001 500,001
------------ -------------- -------------- ---------------
Net cash provided by (used in) financing activities 4,897,824 24,839,899 (330,641) 48,964,337
------------ -------------- -------------- ---------------
Increase (decrease) in cash and cash equivalents 398,705 20,060,694 (11,659,813) 9,120,547
Cash and cash equivalents at beginning
of year/period 320,961 719,666 20,780,360
------------ -------------- -------------- ---------------
Cash and cash equivalents at end of year/period $ 719,666 $20,780,360 $ 9,120,547 $ 9,120,547
============ ============== ============== ===============
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 10
Gliatech Inc. and Subsidiaries (A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1994, 1995 and 1996
A. BACKGROUND AND ACCOUNTING POLICIES
BACKGROUND
Gliatech Inc. (Gliatech) is engaged in the development and commercialization of
medical devices designed to inhibit excess surgical scarring and adhesion
following surgery. In addition, Gliatech is pursuing the development of drug
candidates for the treatment of certain nervous system disorders, including
Alzheimers Disease, and cognitive disorders. Gliatech began operations on August
31, 1988 and is currently in the development stage, as operations consist
primarily of research and development expenditures, and significant revenues
from planned principal operations have not yet been realized. Product sales
consist of sales of Gliatech's first two medical device products, ADCON(R)-L and
ADCON(R)-T/N, to independent distributors in Europe, Australia and New Zealand.
The consolidated financial statements reflect the financial position and
results of operations of Gliatech Inc. and its wholly-owned subsidiaries (the
Company). Intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount of the
Company's cash equivalents approximates fair value due to the short-term
maturity of those investments. Cash equivalents are primarily in commercial
paper.
SHORT-TERM INVESTMENTS
The Company's short-term investments, all of which are classified as
available-for-sale, consist primarily of corporate bonds. Such investments are
stated at cost, which approximates fair value due to the short-term maturities
of these securities.
INVENTORIES
Inventories are stated at the lower of cost or market and are valued using the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Laboratory and office equipment and
leasehold improvements are depreciated on the straight-line basis over the
shorter of the lease period or the estimated useful lives (5 to 10 years).
PATENT RIGHTS AND TRADEMARKS
Patent rights are amortized on the straight-line basis over the shorter of the
estimated useful life of the patented technology or the useful life of the
patent, beginning at the time the patent is granted. Costs associated with
patents that are abandoned are expensed at the date of abandonment. Trademark
costs are amortized on the straight-line basis over the estimated useful life of
the trademark, beginning at the time the trademark is granted.
GOVERNMENT GRANTS
Revenues from government grants are recognized ratably over the period of the
grant.
RESEARCH CONTRACTS AND LICENSING FEE REVENUE
Revenue from the research collaboration agreements are recorded when earned as
defined under the terms of the agreements. Periodic research funding payments
received which are related to future performance are deferred and recognized as
income when earned. Licensing fees and other milestone payments are recognized
as income when earned.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the currently enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Prior to the adoption of SFAS No. 109,
income tax expense was determined using the deferred method prescribed by
Accounting Principles Board Opinion (APBO) No. 11, Accounting for Income Taxes.
PRO FORMA NET LOSS PER COMMON SHARE
For 1994 and 1995, pro forma net loss per common share is computed using the
weighted average number of shares of common stock outstanding. However, common
and common equivalent shares including preferred stock (all of which converted,
according to their terms, upon the completion of the Company's initial public
offering--see Note G) issued by the Company and stock options and
19
<PAGE> 11
warrants granted during the twelve-month period immediately preceding the filing
of the initial public offering at prices below the initial public offering price
have been included in the calculation of the shares used in computing pro forma
net loss per common share as if they were outstanding for all of 1994 and for
the six month period ended June 30, 1995 (the latest interim period reported in
the initial public offering). In addition, common equivalent shares from
preferred stock (all of which converted, according to their terms, upon the
completion of the Company's initial public offering) issued prior to the
twelve-month period immediately preceding the filing of the Company's initial
public offering are included in the computation of pro forma net loss per common
share as if they had been converted on the original date of issuance. Pro forma
net loss per common share for periods subsequent to June 30, 1995 is computed in
accordance with APBO No. 15, Earnings Per Share which does not permit earnings
per share to give effect to anti-dilutive securities. Common equivalent shares
relating to stock options and warrants are excluded for periods subsequent to
June 30, 1995 as their effect is anti-dilutive.
For 1996, net loss per common share is based on the weighted average number
of common shares. Outstanding common equivalent shares relating to stock options
and warrants are excluded as their effect is anti-dilutive.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with APBO No.
25, Accounting for Stock Issued to Employees.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform with the 1996
financial statement presentation.
B. INVENTORIES
Inventories consists of:
<TABLE>
<CAPTION>
December 31
1995 1996
- -------------------------------------------------------
<S> <C> <C>
Raw materials $304,882 $129,095
Work in process 112,777 196,502
Finished goods 61,521
---------- -----------
$417,659 $387,118
========== ===========
</TABLE>
C. PROPERTY AND EQUIPMENT
Property and Equipment Consist of:
<TABLE>
<CAPTION>
December 31
1995 1996
- -------------------------------------------------------
<S> <C> <C>
Laboratory equipment $ 1,045,745 $ 1,138,398
Office equipment 154,698 410,583
Leasehold improvements 416,167 782,782
------------- --------------
1,616,610 2,331,763
Accumulated depreciation
and amortization (1,049,649) (1,202,092)
------------- --------------
Property and
equipment, net $ 566,961 $ 1,129,671
============= ==============
</TABLE>
D. OTHER ASSETS
Other Assets Consist of:
<TABLE>
<CAPTION>
December 31
1995 1996
- -------------------------------------------------------
<S> <C> <C>
Patent rights, net of
accumulated amortization of
$46,744 at December 31,
1995 and $60,712 at
December 31, 1996 $788,042 $605,385
Trademark costs 53,523 56,810
Other 11,622 13,764
---------- -----------
$853,187 $675,959
========== ===========
</TABLE>
E. FINANCING ARRANGEMENTS
The Company has an unsecured line of credit that provides for borrowings up to
$1,500,000 at an interest rate of 1% above the banks insured money market
savings account rate. No borrowings were outstanding at December 31, 1996.
Borrowings outstanding at December 31, 1995 were $400,000 and carried an
interest rate of 3.28%.
20
<PAGE> 12
Rent expense relating to the operating lease of office space was
approximately $241,000, $234,000 and $297,000 in 1994, 1995 and 1996,
respectively. Future annual minimum lease commitments at December 31, 1996 are
as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------
1997 $ 285,874
1998 338,964
1999 354,564
2000 354,564
2001 354,564
-------------
Total $1,688,530
=============
</TABLE>
F. INCOME TAXES
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $14.8 million for income tax purposes. In addition, the Company
has approximately $1.9 million in research and development tax credit
carryforwards. Such losses and credit carryforwards are available to reduce
future tax liabilities and expire at various dates between 2003 and 2011. The
Company has offset the tax benefit of the net operating loss and tax credit
carryforwards and other deferred tax assets with a valuation allowance as
realization of the benefits is not assured.
The Companys net deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
1995 1996
- -------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities $ (284,000) $ (217,000)
Deferred tax assets 10,156,000 12,292,000
Valuation allowance (9,872,000) (12,075,000)
-------------- ---------------
Net deferred taxes $ 0 $ 0
============== ===============
</TABLE>
The Company's deferred tax liabilities related primarily to patent costs.
The deferred tax assets relate to the following:
<TABLE>
<CAPTION>
1995 1996
- --------------------------------------------------------
<S> <C> <C>
Amortization of capitalized
research and
development expenses
for tax $ 4,080,000 $ 5,100,000
Research and
development tax credit
carryforwards 1,464,000 1,883,000
Net operating tax loss
carryforwards 4,548,000 5,038,000
Other 64,000 271,000
------------- --------------
$10,156,000 $12,292,000
============= ==============
</TABLE>
Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss and research and development tax credit carryforwards for tax purposes may
be subject to an annual limitation if a cumulative change in ownership of more
than 50 percent occurs over a three-year period.
G. CAPITALIZATION
On October 24, 1995, the Company consummated an initial public offering of
2,300,000 shares of common stock at an initial public offering price of $9.50
per share (the "Offering"). The Company received net proceeds from the Offering
of approximately $19,647,000. In connection with the Offering, an amendment to
the Company's Certificate of Incorporation was filed to effect a five-for-one
reverse stock split of each share of common stock. All share and per share
information in the accompanying financial statements and conversion ratios of
all series of Preferred Stock and Class A Common Stock were adjusted to reflect
the reverse split. Immediately prior to the consummation of the Offering, all
shares of Class A Common Stock and all series of Preferred Stock automatically
converted pursuant to the Company's Certificate of Incorporation at applicable
conversion rates into a total of 4,718,014 shares of common stock.
21
<PAGE> 13
After the conversion and immediately prior to the consummation of the
Offering, the Company filed a Restated Certificate of Incorporation which
authorized the issuance of 30,000,000 shares of common stock and 5,000,000
shares of Preferred Stock at $.01 par value.
At December 31, 1996, 1,166,510 shares of common stock are reserved for
issuance under the stock option plans, 20,000 shares are reserved for issuance
under common stock warrants outstanding for $7.50 per share, and 5,134 shares
are reserved for common stock bonuses declared but unissued at December 31,
1996.
Prior to April, 1991 certain preferred stock issuances were mandatorily
redeemable, and accordingly, periodic accretion to the redemption price was
charged to the deficit accumulated during the development stage.
H. STOCK OPTION PLANS
The Company has three stock-based compensation plans. The Company applies APBO
No. 25, Accounting for Stock Issued to Employees and related Interpretations in
accounting for its plans, which requires that for certain options granted, the
Company recognize as compensation expense the excess of the deemed fair value
for accounting purposes of the common stock over the exercise price of the
options. For the majority of options, no compensation cost has been recognized.
Had compensation cost for the Company's three stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS No.123, Accounting for
Stock-Based Compensation, the Company's net loss and net loss per share would
have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
- -------------------------------------------------------
<S> <C> <C>
Net loss
As reported $(4,985,861) $(5,699,555)
Pro forma $(5,124,584) $(6,351,247)
Primary loss per share
As reported $ (0.91) $ (0.78)
Pro forma $ (0.93) $ (0.87)
</TABLE>
Under the Amended and Restated 1989 Stock Option Plan, the Company is
authorized to issue 1,020,000 incentive stock options. Under the 1992 Directors
Option Plan, the Company is authorized to issue 40,000 non-qualified stock
options. Under the 1995 Non-employee Directors Stock Option Plan, the Company is
authorized to issue 150,000 non-qualified stock options. These options vest over
a three, four or five year period and become exercisable in part one year after
date of grant and expire at the end of ten years.
For pro forma calculations, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1995 and 1996:
expected volatility of 67 percent, risk-free interest rates ranging from 5.32
percent to 6.49 percent, and an average expected life of 4 or 5 years for issued
options.
22
<PAGE> 14
At December 31, 1996 there were 197,635 options available for future grant.
A summary of the status of the Company's three stock option plans as of
December 31, 1996 and 1995 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-Average WEIGHTED-AVERAGE
Shares Exercise Price SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 326,700 $3.43 765,700 $6.34
Granted 464,700 8.22 247,800 8.53
Exercised (13,850) 2.50 (12,175) 7.50
Canceled (11,850) 3.87 (32,450) 7.70
------- --------
Outstanding at end of year 765,700 6.34 968,875
======= ========
Options exercisable at year-end 227,205 362,650
Weighted-average fair value of options
granted during the year $4.92 $5.15
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Range of Number Weighted-Average Weighted- Number Weighted-
Exercise Outstanding Remaining Contrac- Average Exercisable Average
Prices at 12/31/96 tual Life (Yrs) Exercise Price at 12/31/96 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0- 5 186,500 3.21 $ .97 186,000 $ .97
5-10 747,975 8.80 8.02 176,650 8.02
10-15 34,400 9.36 13.10
</TABLE>
In May 1991, all previously issued options with an exercise price of $.70
were canceled and reissued at an exercise price of $.35.
I. RESEARCH COLLABORATION AGREEMENTS
In October 1994, the Company established a research and development
collaboration with Janssen Pharmaceutica, N.V. of Beerse, Belgium (Janssen), a
wholly owned subsidiary of Johnson & Johnson, for the discovery and development
of compounds suitable for the treatment of Alzheimer's Disease and other
neurodegenerative diseases. Under the terms of the agreements, the Company
received an initial licensing fee and Janssen will provide research funding over
a three-year research period, renewable for a fourth and fifth year. In
addition, Janssen will make milestone payments to the Company upon the
achievement of development and clinical benchmarks. The Company will receive a
royalty on sales of marketed products and Janssen will be responsible for all
development costs, including clinical trials and obtaining regulatory approval.
Deferred revenue related to these agreements was $279,095 and $806,359 at
December 31, 1995 and 1996, respectively. In October 1994, Johnson & Johnson
Development Corporation made an equity investment in the Company.
J. RESEARCH, CLINICAL TRIAL, CONSULTING AND
LICENSE AGREEMENTS
Since beginning operations, the Company has entered into research agreements and
clinical trial agreements with universities and third parties and consulting
agreements with scientific advisors. The research agreements require the Company
to fund certain research activities, and are generally renewable on an annual
basis. In return, the Company has rights to obtain and use exclusive licenses
for the results of the research. Under license agreements with various
universities, ownership of all patents resulting from research agreements will
remain with the universities or researchers. The Company is required to incur
all costs associated with applying for and maintaining the patents. The Company
generally will obtain exclusive worldwide
23
<PAGE> 15
licensing rights and is required to remit fixed percentages, as defined, of the
net selling price of licensed products and royalties received from sublicensees
to the universities. The clinical trial agreements require the Company to fund
the performance of specific clinical procedures and the cost of administering
the clinical trials.
As of December 31, 1996, minimum commitments under research, clinical trial
and consulting agreements are $1,162,827 for 1997 ($405,207 at December 31,
1995).
K. OTHER MATTERS
The Company is a party to a license agreement and a related sponsored research
agreement with a university that provides for a royalty of up to 5% of revenues
from products covered by these agreements. In 1995, a dispute regarding
inventorship of the ADCON(R) products and the rights of the university to
receive royalties from sales of ADCON(R) products arose between Gliatech and the
university. The university has threatened litigation regarding this dispute.
There has been no resolution of this matter. The Company is not able to make any
estimate of costs that may arise as a result of any outcomes from this dispute
and there can be no assurance that the Company will not be required to pay any
costs or royalties or that any costs to the Company, or royalties that may
result, from this dispute will not have an adverse effect on the Company.
24
<PAGE> 16
STOCKHOLDER INFORMATION
Corporate Office
Gliatech Inc.
23420 Commerce Park Road
Cleveland, Ohio 44122
Phone: (216) 831-3200
Fax: (216) 831-4220
TRANSFER AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
INDEPENDENT AUDITORS
Ernst & Young LLP
1300 Huntington Building
925 Euclid Avenue
Cleveland, Ohio 44115-1405
OUTSIDE COUNSEL
Jones, Day, Reavis & Pogue
North Point, 901 Lakeside Avenue
Cleveland, Ohio 44114
ANNUAL MEETING
The annual meeting of stockholders will take
place on May 14, 1997, at 11:00 a.m.
at the Cleveland Marriott East,
3663 Park East Drive, Beachwood, Ohio.
10-K REPORT AVAILABLE
Stockholders may obtain a copy of the
Company's Annual Report on Form 10-K
filed with the Securities and Exchange
Commission, including financial
statements and schedules thereto, but
excluding other exhibits, by writing to:
Rodney E. Dausch
Vice President, Chief Financial Officer
Gliatech Inc.
23420 Commerce Park Road
Cleveland, Ohio 44122
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's Common Stock is traded on the Nasdaq National Market (GLIA). As of
the close of business on March 1, 1997, there were 203 stockholders of record
for the Company's Common Stock. The Company commenced trading on the Nasdaq
National Market on October 17, 1995.
The table below sets forth the high and low closing prices for the
Company's Common Stock during 1995 and 1996:
<TABLE>
<CAPTION>
1995: High Low
- ----------------------------------------------------------
<S> <C> <C>
Fourth Quarter 9 7/8 7 7/8
1996:
FIRST QUARTER 16 5/8 8
SECOND QUARTER 15 1/8 10
THIRD QUARTER 10 3/4 7 1/2
FOURTH QUARTER 10 1/8 7 3/4
</TABLE>
The Company has never paid any cash dividends on its capital stock and
does not anticipate paying any in the foreseeable future. The payment of future
dividends, if any, will be at the discretion of the Company's Board of
Directors after taking into account various factors, including the Company's
financial condition, operating results, current and anticipated cash needs and
plans for expansion.
(C)Gliatech Inc., 1997 Design:Financial Communications, Inc. Bethesda, MD
<PAGE> 1
Exhibit 21.1
Subsidiaries Of The Company
State
of
Name Incorporation Business Name
- ---- ------------- -------------
Gliatech R & D, Inc. Ohio Gliatech R & D, Inc.
GIC, Inc. Delaware GIC, Inc.
X-25
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-00406) pertaining to the Amended and Restated 1989 Stock Option Plan
and 1992 Directors Stock Option Plan of Gliatech Inc., and in the Registration
Statement (Form S-8 No. 33-00408) pertaining to the 1995 Nonemployee Directors
Stock Option Plan of Gliatech Inc. of our report dated February 11, 1997, with
respect to the consolidated financial statements of Gliatech Inc. incorporated
by reference in the 1996 Annual Report (Form 10-K) for the year ended December
31, 1996.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 31, 1997
X-26
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
directors and officers of Gliatech Inc., a Delaware corporation, hereby
constitutes and appoints Thomas O. Oesterling, Ph.D., Rodney E. Dausch, Michael
A. Zupon, Ph.D. and Thomas C. Daniels, and each of them, as the true and lawful
attorney or attorneys-in-fact, with full power of substitution and revocation,
for each of the undersigned and in the name, place and stead of each of the
undersigned, to sign on behalf of each of the undersigned an Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, pursuant to Section 13 of
the Securities Exchange Act of 1934 and to sign any and all amendments to such
Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, including, without limitation, a Form 12b-25,
with the Securities and Exchange Commission, granting to said attorney or
attorneys-in-fact, and each of them, full power and authority to do so and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all that said
attorney or attorneys-in-fact or any of them or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in multiple
counterparts, each of which shall be deemed an original with respect to the
person executing it.
Executed as of this 26th day of February 1997.
/s/ Robert P. Pinkas /s/ Allen H. Ford
- ----------------------------- --------------------------------
Robert P. Pinkas Allen H. Ford
Director Director
/s/ Robert D. Pavey /s/ Irving S. Shapiro
- ----------------------------- --------------------------------
Robert D. Pavey Irving S. Shapiro
Director Director
/s/ Theodore E. Haigler, Jr. /s/ Thomas O. Oesterling, Ph.D.
- ----------------------------- --------------------------------
Theodore E. Haigler, Jr. Thomas O. Oesterling, Ph.D.
Director President and Chief Executive
Officer (Principal Executive
Officer) and Director
/s/ John L. Ufheil /s/ Karen Diedrich
- ----------------------------- --------------------------------
John L. Ufheil Karen Diedrich
Director Controller
(Principal Accounting Officer)
/s/ Rodney E. Dausch
- -----------------------------
Rodney E. Dausch
Vice President, Secretary and
Chief Financial Officer
(Principal Financial Officer)
X-27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Gliatech
Inc's annual report on Form 10-K for the year ended Decemebr 31, 1996, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,121
<SECURITIES> 8,875
<RECEIVABLES> 344
<ALLOWANCES> 13
<INVENTORY> 387
<CURRENT-ASSETS> 18,999
<PP&E> 2,332
<DEPRECIATION> (1,202)
<TOTAL-ASSETS> 20,804
<CURRENT-LIABILITIES> 3,177
<BONDS> 0
<COMMON> 73
0
0
<OTHER-SE> 17,554
<TOTAL-LIABILITY-AND-EQUITY> 20,804
<SALES> 901
<TOTAL-REVENUES> 3,878
<CGS> 342
<TOTAL-COSTS> 342
<OTHER-EXPENSES> 10,356
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (5,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,700)
<EPS-PRIMARY> (.78)
<EPS-DILUTED> .0
</TABLE>
